As gold was finishing its historic three-year rally in 2012, gold mining stocks were beginning their historic two-year crash. In 2013, gold began to pull back, but gold mining stocks plunged by almost twice as much. Value investors who typically heed Warren Buffett (Trades, Portfolio)'s admonition that gold has zero ability to produce began to take notice of the deeply discounted sector that produces the gold.
Gold Miner ETF (GDX)
Arnold Van Den Berg (Trades, Portfolio), a noted value investor and founder, chairman and co-chief investment officer at Century Management, found fourth quarter 2013 an opportune time to invest in mining companies. In a Feb. 21 memo titled "Inflation, Gold and Gold Mining Companies," Van Den Berg called them "bargains," and "as cheap today as they were 13 years ago."
"While physical gold is not in our buy zone, many gold mining companies are selling as if the price of gold is currently $800 to $900 per ounce, which is 28% to 36% lower than gold's closing price on January 31, 2014, and well within our buy zone," he said.
Van Den Berg took a basket approach to his mining investment in order to diversify both by size of the company and geographical location. The basket contains 10 to 12 new stocks, representing approximately 10% of their portfolio. If the stocks become further discounted, he says he would consider going as high as 15% to 20% of the total portfolio.
In addition to a his proprietary resource valuation models, Van Den Berg mentioned that he valuates gold mining companies by P/B ratios, P/S ratios, strength of balance sheet and efficiency or low cost of mining.
Below are some highlights of Van Den Berg's new mining stock investments in his fourth-quarter 2013 portfolio.
Newmont Mining Corp. (NEM)
Newmont Mining is Van Den Berg's largest mining position. With 1,724,044 total shares, it represents 3.7% of his portfolio and makes it his seventh largest position.
Unlike most of his mining stocks, Newmont is not a new position for Van Den Berg. He initiated the position in first quarter 2012 at an average price of $59. He did increase the position in fourth quarter 2014, however, by adding 76,398 shares at an average price of $26.
Here is his holding history:
NEM is more discounted compared to the Market Vectors Gold Miners ETF - down 44.4% compared to 21% over the past five years. It also underperformed year to date, gaining 5.6% compared to 23%.
Newmont Mining primarily produces gold, and does business in the U.S., Australia, Peru, Indonesia, Ghana, New Zealand and Mexico, with headquarters near Denver, Colo.
Newmont currently trades at a P/S ratio of 1.4, which is its lowest point since 2000. It has a P/B ratio of 1.2, near a historic low.
Newmont also has $1.6 billion in cash on its balance sheet as of year-end, and no borrowings from its $3 billion revolving credit facility.
For full-year 2013, Newmont met the high end of its production forecasts. For its 2014 outlook, it has projected stable gold production and higher copper production, along with reduced capital and overhead.
Newmont Mining Corporation has a market cap of $12.05 billion; its shares trade at around $24.21 on Monday. The dividend yield of Newmont Mining Corporation stocks is 5.0%.
Seabridge Gold Inc. (SA)
Seabridge Gold is a minor position within Van Den Berg's basket of mining stocks, but it provides insight into his valuation methodology, as he used it as an example in his gold mining memo. Van Den Berg owns 83,44 shares of Seabridge, acquired in fourth quarter 2013, when the price averaged $8 a share. The position is 0.58% of his portfolio, around the same size as his other mining stocks.
Seabridge is a development stage company operating in North America, and engages in acquisition and exploration of gold properties, according to Van Den Berg.
He valued the company by dividing its market cap by the amount of its reserves.
"During the first six weeks of 2014, gold prices averaged $1,244 per ounce while Seabridge traded mostly between $7.50 and $8.50 per share, roughly the same price as when gold was $712.50 (i.e. 42% lower)!" Van Den Berg wrote in his note. "In other words, our analysis indicates that Seabridge is selling at bargain levels relative to reserves."
He went on to breakdown the valuation. "By taking the company's enterprise value (i.e. stock value + debt - minus cash = total worth) and dividing it by the reserve volume in ounces, we can determine how much investors are valuing Seabridge's reserves," Van Den Berg wrote.
He illustrated the calculations in the chart below:
Van Den Berg further notes that Seabridge is trading at a P/B ratio lower than it did in 2008, when gold was much cheaper. That P/B is 1.8, compared to a low point of 4.4 and high of 13.38 in 2008, and also near a 10-year low.
Seabridge Gold Inc. has a market cap of $425.7 million; its shares trade around $9.04 on Monday. Seabridge had annual average earnings growth rates of 36.2% for EBITDA, 24.7% for free cash flow and 23.2% for book value on a per-share basis over the past five years.
Anglogold Ashanti (AU)
Van Den Berg's largest new mining position is also the second-most held mining stock of all investment gurus tracked by GuruFocus: Anglogold Ashanti Ltd. (AU). Thirteen gurus own shares, which is 7.7% of all represented. [This information was found using the All-In-One Screener. Try it here. For Premium Members only.]
Van Den Berg bought 592,615 shares of the company - equal to 0.66% of the portfolio - which had a fourth-quarter average price of $14. The price has since risen 36% to $18.47 a share on Monday. It also far outperformed the mining index, leaping 58% year to date.
Anglogold is a gold exploration, mining and marketing company, with operations on four continents and headquarters in Johannesburg South Africa.
Anglogold is trading near the bottom of its historical P/B and P/S ratios. Its P/B ratio at 1.4 is near its lowest level since 2000. Its P/B ratio at 1.9 is lower has not been lower than 2000, with the exception of a brief point in 2008.
In February, the company announced that for 2013 it had increased annual production for the first time in nine years, reporting 4.105 million ounces, more than its guidance. This compared to 3.944 million ounces in 2012, and further growth is expected in 2014.
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- Commodity Markets
- Basic Materials Industry
- Gold Mining Companies
- Seabridge Gold
- Newmont Mining