Though the stock market has been seemingly unstoppable for the better part of eight years, gold and gold stocks that have quietly put on a show since the beginning of 2016. Spot gold has jumped more than $235 an ounce from its lows, while many of the mining companies that produce gold have moved even higher.
Bringing gold miners' book value into focus
But despite this jump in gold prices and gold mining companies, valuations still remain relatively tame. In fact, a quick screen of gold stocks shows a half-dozen currently valued at less than their book value. For some miners, this anemic valuation relative to book makes total sense, while for two companies it could represent an intriguing buying opportunity as it may signal an undervaluation of current assets and production potential.
Take Eldorado Gold (NYSE: EGO) as a perfect example of a company trading well below book value that deserves plenty of investor skepticism. On paper, Eldorado Gold should be a superstar. This up-and-coming miner with assets throughout Turkey and Greece is expected to dazzle Wall Street with its Skouries mine. Located in Greece, Skouries has a projected 25-year life span, to go along with 3 million ounces of gold and 1.5 billion pounds of copper.
Unfortunately, Eldorado Gold's Greek properties are also a source of frustration. Arbitration between Greek regulators and the company over environmental concerns has held up progress at Skouries and the Olympias mine in Greece, causing Eldorado to threaten an investment freeze on these assets for the time being. In other words, weakness in Eldorado's valuation is very much warranted at this point given the ongoing uncertainty surrounding its Greek assets and intermediate-term production.
However, two miners with price-to-book values below 1 could make for quite the steal.
Arguably the greatest below-book steal of all gold stocks could be mid-cap Yamana Gold (NYSE: AUY). Yamana Gold has been weighed down for the past five years by its higher debt levels and hefty capital expenditures. Over the past five quarters, the company has missed Wall Street's earnings-per-share consensus each time, and lately it's been only nominally profitable for most quarters.
However, that could soon change. The reason Yamana's capital expenditures have been so high, and why its costs haven't been the lowest in the industry, is because it's developing three new sources of production that are set to come on line in 2018 or 2019. The Cerro Moro and C1 Santa Luz mines are by far the most exciting. Cerro Moro remained on track and budget as of the company's second-quarter update, and it's expected to yield an average of 150,000 ounces of gold and 7.2 million ounces of silver over its first three years. Meanwhile, C1 Santa Luz is being recommissioned with the expectation of an average of 114,000 ounces of gold annually for up to a 10-year life span. Both Cerro Moro and Santa Luz should commence production in 2018.
The third development will merely be icing on the cake. The Suruca development within its already successful Chapada property should add between 45,000 ounces of gold and 60,000 ounces of gold annually once it begins commercial production in 2019. Suruca should be able to produce this average for about five years.
If we add these three mines, plus assume a low to mid-single-digit organic expansion to existing mines, Yamana could be looking at a boost in gold equivalent annual production of 35% to 40% by the end of the decade. That's huge, because as Yamana's production and sales increase, it's expected all-in sustaining costs (AISC) should fall.
So, we have a company that should have a below-industry average AISC, improving margins, and an expected major jump in cash flow and profitability, all within the next two years. Yet, it's currently valued at just 55% of book value. I'd call that a screaming value.
The other intriguing option in the gold industry is Goldcorp (NYSE: GG), a large-cap producer of gold and other precious metals and byproducts. Goldcorp's weakness over the past five years has mainly been a result of gold and silver prices falling from their 2011 highs. But, like Yamana, Goldcorp has a lot to offer long-term investors.
To begin with, as a larger mining company, Goldcorp is all about efficiency. It has two levers it regularly pulls in order to boost margins. First, as noted, Goldcorp relies on byproducts in its mines (lead, zinc, copper, and even silver) to help lower its costs to mine gold. In its most recent quarter, Goldcorp produced over 84 million pounds of zinc, 26 million pounds of lead, 7.9 million pounds of copper, and 7.4 million ounces of silver. Being able to sell these metals alongside its gold production regularly pushes its AISC well below that of its peers.
Second, the company has internal controls it can use to lower costs. Aside from tinkering with its capital expenditure budget, it's been working to lower costs within its existing mines. It set out to eliminate $250 million in annual costs, and will recognize about $200 million in annual savings this year. Management has commented that its initial $250 million will be achieved, and it actually may need to raise the bar because it expects to save even more annually.
In terms of production, continued ramp-up and its Eleonore and Cerro Negro mines should allow Goldcorp an opportunity to expand its gold equivalent output by perhaps 20% by 2022. In the meantime, its efficiency standards might push its already low AISC (an expected $825 an ounce in 2017) up to 20% lower by 2022. Despite this, and the expectation of a better than doubling in EPS between 2016 and 2020, Goldcorp is valued at just 82% of book value. That could represent an intriguing opportunity for investors.
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