Breakout

Battered, beaten down and now being bought up: The case for owning gold miners

Breakout

Just about two years and 65% percent cheaper and Vancouver-based Goldcorp (GG) may have just fired the opening shot in what could be a sweeping round of consolidation in the mining industry.

While Goldcorp’s $2.3 billion cash and stock offer for Osisko (OSK.TO) made Monday has already been labeled “opportunistic” and “too low,” many industry watchers expect to see more offers coming in the weeks and months ahead.

“What’s really interesting is that (Goldcorp) owned 10% of this company until February 2011, and the valuation of the company when they sold it was about $5.4 billion,” says Jim Jubak, senior markets editor at MoneyShow in the attached video. “They now want to buy the whole company for $2.4 billion,” he says, adding “you can see exactly what’s going on in the gold sector.”

Osisko isn’t the only miner that’s been slumping alongside the price of gold. Both it and Goldcorp shed about 40% last year, compared to a drop of about 55% for the Market Vectors Gold Miners ETF (GDX) and a 28% slide for the metal itself via the SPDR Gold ETF (GLD).

As a result, Bloomberg points out, mining stocks are currently sporting the lowest price-to-book ratios in twenty years.

From his purview, Jubak thinks investors who want to play the mining consolidation theme would be better served buying individual names, rather than a mining fund.

“What you’re looking for, what’s driving this consolidation, is ore grades. You really want to find companies that have the highest ore grade,” he says, referring to the percentage of actual metal that is in the dirt being excavated. By that measure, he says Yamana Gold (AUY) and Randgold (GOLD) are names worth owning, since their reserves would, theoretically, still cover the cost of extraction.

Even so, Jubak offers this advice.

“The thing with mining stocks is, the reason you like them is because they’re leveraged to gold, and the reason you hate them is because they’re leveraged to gold.”

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