by James Brumley | November 8, 2012 11:12 am
When one major precious metals miner offers an explanation for waning results, it’s noteworthy. When another huge miner focusing on a completely different precious metal says the exact same thing, it goes from “noteworthy” to “problematic.”
That’s unfortunate for shareholders of gold miner Barrick Gold (NYSE:ABX) and silver miner Coeur d’Alene Mines (NYSE:CDE), since both precious-metals names reported disappointing numbers last week, with the same root cause.
Last quarter, Coeur d’Alene Mines earned a profit (operating) of $0.29 per share, well under the year-ago figure of $1.05. Revenue slumped 33% on a year-over-year basis — partially because silver prices were about 20% lower than they were in the third quarter of 2011, and partially because the company’s total silver output fell 10% thanks to some problems with its Palmarejo (Mexico) prospect.
For the most part, it’s all pretty typical stuff. It’s the footnotes, however, that raise red flags.
Coeur d’Alene’s CEO Mitchell Krebs noted, “The company’s third quarter was negatively impacted by lower production and higher unit costs at the Palmarejo mine in Mexico.” Keep that footnote in mind for a moment.
Barrick didn’t fare much better when it announced its Q3 results last week. The company earned $0.62 per share, falling well short of the year-ago comparable of $1.36. Production fell nearly 8%, and the average price of gold fell 5% from the average price realized in the third quarter of 2011. Revenues fell a total of 13.5%, on a combination of tepid demand and tepid prices.
Reading between the lines, you start to realize that many of the miners’ dreams were bigger than reality — and geology — can support. Apparently mining is getting expensive, but it’s not staying fruitful. It’s unlikely that other names in the industry avoided the pitfalls Barrick and Coeur d’Alene experienced — and investors are finally getting a little jaded.
Translation: The boys within the gold and silver mining arena are about to be separated from the men, making some of the buy-worthy, and some of them sell-worthy. Two names quickly come to mind for each grouping.
It seems like cheating to deem Coeur d’Alene and Barrick Gold as the precious-metals miners not worth owning, as they’ve both already been cited as proverbial problem children. Thing is, they really are among the weakest of the weak names in their respective businesses; last quarter was just a microcosm of a big, expensive, ongoing trend for each company. There’s not a lot for investors to look forward to by owning shares.
While some gold and silver miners are under more than a little pressure, other names in the business are still going strong, perhaps capitalizing on the headwinds other companies in the same space are now facing by doing something a little different.
Silver Wheaton (NYSE:SLW) is the top name on the silver front, because it’s got a slightly different revenue model. It’s a silver-streaming organization — rather than mine directly for silver, it actually processes the byproduct created by other silver miners to extract what the miner may have missed. Silver Wheaton also has a large network of smelters who have agreed to buy whatever silver bulk-concentrate can provide them, making the company a cash-flow hero. The forward-looking P/E of 17.3 vs. double-digit sales- and earnings-growth rates address any valuation concerns.
As for the ideal gold mining name right now, traders should consider Newmont Mining. (NYSE:NEM). It’s not a streaming play like Silver Wheaton, but it hasn’t run into the same headwinds of high-costs that Barrick and Coeur d’Alene have (yet, anyway). In fact, Newmont has consistently grown the top and bottom line since getting back in the black in 2008.
That’s not to say NEM is the textbook-perfect gold mining play. The company reported a few days ago that it would actually post negative free-cash-flow numbers through 2013 as it invests in its own growth. Beyond that, however, Newmont Mining expects to be cash-flow-positive again. Don’t mistake a negative cash flow for losses, though; Newmont Mining has been and will continue to be profitable as far down the road as analysts care to look.
Perhaps more important, it’s pretty clear from the announcement that Newmont recognized rising expenses were crushing other gold miners, prompting the company to make a deliberate and intensive effort to control those costs before they got out of hand. And it looks like the effort has paid off.
James Brumley does not have positions in any of the stocks mentioned in this article.
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