Are Gold Miners A Buy?

Gold fever has struck the markets as unstable equities have led to the metal appreciating at a rapid pace. In fact, the price per ounce has shot up roughly 50% in the trailing year as a number of factors have converged to drive the price skyward. As the metal has rapidly approached the $2,000 per ounce level, investors have begun to speculate whether or not it is overvalued. There are compelling arguments for either side, but the truth is, gold is a difficult asset to value; it produces no cash flow, pays out no dividends, and has no underlying financials to sort through to determine what its true value is. One analyst goes as far to say that trying to value the metal is like “trying to solve a Rubik’s cube while you are blindfolded” [see also Three Ways To Play $2,000 Gold].

While investors and experts will argue over whether gold is ready to dive or jump, one glaring opportunity lurks behind the luster of the metal; mining stocks. 2011 saw a number of mining firms get off to a rough start despite gold itself performing exceptionally well. After having such a strong 2010, many investors were frustrated to watch their mining stocks dive while gold itself surged, after all, miners are typically thought of as a leveraged play on gold. So while gold has been climbing, these major mining firms have seen little appreciation in price, leaving them to be undervalued by many standards [see also Three Reasons Why Gold Is Overvalued].

With gold jumping so rapidly it would make sense to see the mining stocks do the same, but this has not been the case. GDX, a popular gold miners ETF, Barrick Gold (ABX), and Newmont Mining (NEM) have trailing one year returns of 17.8%, 17.6%, and 5.5% respectively. During this same timeframe, the SPDR Gold Trust (GLD) gained a massive 41.2%. With the underlying product of every gold miner appreciating quickly in the last year, for the stocks to not do the same is somewhat puzzling [see also Dividend Special: Top Companies In Every Major Commodity Sector].

Another interesting point to note is that both ABX and NEM have current P/E ratios between 13-14, keeping them in line with the S&P 500. While this would normally be something to overlook, considering gold’s rapid appreciation one would certainly expect these ratios to be significantly higher. But after remaining beaten down for several months, these stocks may finally be staging a comeback, as the prices have risen recently to reflect the jump in gold prices. Below, we outline several gold miners for those investors who feel that these securities are undervalued, and due for a comeback:

When it comes to gold miners, Barrick is the king. ABX has a market cap topping $53 billion and an average daily volume of over 9 million shares. Through the first six months of the year, ABX dropped 10.6% as the entire gold mining space took a hit. But since June 1st, the stock has gained roughly 13.6% bringing ABX back into the black on the year. This stock features supreme liquidity and exposure to one of the most stable mining firms in the world [see also Company Spotlight: Barrick Gold Corporation (ABX)].

Though Barrick typically takes the gold mining spotlight, Newmont is not far behind. NEM has a market cap of $32.7 billion and exchanges hands roughly 7.5 million times each day. And what’s more, NEM offers an attractive dividend yield of 1.80%, adding a steady income stream to your portfolio. The majority of its key financial indicators look healthy, but investors should note that it is nearly 85% institutionally owned, meaning that it could be due for big swings if one particular heavy-hitter decides to increase their position or sell out. In H1 2011, NEM dipped 9.1%, but since we have waded into the home stretch of the year, the stock has gained 19%.

This ETF tracks an index which provides exposure to publicly traded companies worldwide involved primarily in the mining for gold, representing a diversified blend of small-, mid- and large- capitalization stocks. Top holdings in the fund include Barrick, Newmont, Goldcorp, Kinross, and Silver Wheaton. The fund is majority composed of international stocks of which most companies are headquartered in Canada. The ETF lost 7.2% through the first half of the year, but was able to turn around and post gains of 12.3% ever since. While GDX is a popular gold mining allocation, it takes harsh criticism for including a number of companies whose main business is derived from other metals, leading to the final security on this list [see also Commodity Investing: Physical vs. Futures].

This ETF seeks to differentiate itself by only investing in companies that generate the vast majority of their business from gold mining, giving investors more ‘pure play’ exposure. The fund is relatively new, hitting the market in March of this year from Global X. A close inspection of the top holdings will reveal that neither Barrick nor Newmont make an appearance. Instead, names like Kinross, Allied Nevada Gold Corp, and Harmony Gold Mining dominate the fund’s allocations. Similar to GDX, the fund consists mainly of internationally-based companies with Canada leading the way as far as country exposure is concerned. GGGG gained 2.4% between its inception and June 1, and has gained 6.5% more since suggesting that its pure gold strategy has been outperforming the competition [see also Three Mining Companies With Robust Yields].

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Disclosure: No positions at time of writing.