As you would expect, the gold price is the tail that wags the
gold-mining dog. The tail has been wagging down. Gold
has lost significant value over the past 18 months, and so have
the gold miners - represented by the
Market Vectors Gold Miners ETF (
. Specifically, the gold price is down 23%; the GDX is down more
Graphs like the one above invariably pique my interest.
I like when assets go on sale.
Gold and the gold miners
are certainly cheaper compared to where they traded a couple of
years ago, when the outlook was as detached from reality as any
Elvis Presley movie.
Though gold miners are imperfect proxies for physical gold,
the correlation in price movement is close enough to offer
diversification benefits. More important from an
income-investor's perspective, gold miners offer a benefit
physical gold lacks - cash flow.
I think gold and the gold miners have considerable upside
potential. To be sure, price inflation remains subdued,
with the consumer price index (
) running at 1.6% annually. But gold is more than a
price-inflation hedge: It's a store of value and a hedge against
uncertainty, which is certainly on the rise thanks to a few
belligerent comrades in Ukraine and Russia.
At the same time, the opportunity cost of holding gold remains
low. The yield on the 10-year U.S. Treasury note has fallen to
2.7% this year. This means the real interest rate (nominal
rate minus the CPI) is only 1.1%. A real interest rate below 2%
I see opportunity for investors to pick up gold exposure, cash
flow, and price-appreciation potential in three depressed
gold-mining stocks. I like these individual stocks
because they offer more yield and price-appreciation potential
than the GDX.
Goldcorp Inc. (
tops the list. This miner has considerable girth, with a $22
billion market cap. Goldcorp's growth resides in its vast array
of development and exploration projects in North and South
America. Management is certainly bullish. It expects gold
production to rise 13% to 18% this year to 3.15 million
Cost-saving initiatives implemented over the past year will
benefit margins. Goldcorp's all-in cost per ounce should fall
between $950 and $1,000 per ounce. This points to Goldcorp
maintaining its $0.60 per share annual dividend (paid in $0.05
monthly increments). The board of directors is committed to
returning cash to shareholders, having maintained the dividend
during the perilous decline in the physical gold price last
year. Goldcorp yields 2.3%.
Though a more diverse miner than Goldcorp - with copper,
silver, molybdenum, silver, and cobalt properties -
Freeport-McMoRan Copper & Gold (
still mines a lot of gold. Management expects to mine 1.7 million
ounces of it in 2014.
Risk mitigation is the upside to diversification.
Freeport reported 2013 EPS of $2.64, which easily covered the
$1.25 annual dividend. EPS is expected to increase to $2.79 in
2014, and to $3.14 in 2015. EPS growth bodes well for dividend
and share-price growth. Freeport shares yield 4% on its
discounted price. I don't expect the discount to hold through
I usually bypass a stock after a dividend cut, but
Newmont Mining (
is worth considering, nonetheless. Newmont reduced its dividend
four times in the past four quarters, but this was after
increasing the dividend from 2009 through early 2013. The
dividend still yields 2.5% at its reduced rate.
Dividend cuts appear to be history, and the quarterly dividend
appears sustainable at $0.15 per share. Management affirmed as
much in the fourth-quarter analysts meeting, saying that the
dividend is sustainable with the
hovering above $1,200 an ounce.
Newmont shares are down over 50% in the past 18 months and are
trading near a five-year low. But of the three recommendations,
it has the greatest potential to rise with the gold price.
Newmont is the purest gold play, given that 92% of revenue is
generated by gold sales.
For contrarian income investors, these three gold miners offer
the opportunity to capture not only income but significant price
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