A few years ago — when the sky was falling and the world was being torn asunder — gold was certainly riding high. Peak prices for the precious metal hit a record high of nearly $2,000 per ounce and the various gold stocks and miners saw their shares surge.
The sector was minting so much money that many of the gold stocks began paying some really rich dividends. It seemed that the gold miners could do no wrong.
Then the bottom dropped out.
The global economy recovered, doomsday didn’t happen and investors dumped gold hard. As a result many miners found themselves between a rock and hard place. For many, the lower gold price was well below their cash-cost required to be profitable. And yet there has been some glimmer of hope for the larger gold stocks.
Prices for the yellow metal have been steadily rising — to the point of profitability — and there are some dark clouds beginning to emerge on the global economic picture. All of which begs the question: are the gold stocks finally a big time buy of investors?
Gold Stocks Are All About Price
For the gold miners, only metric really matters and that’s how much it costs for them to pull the precious metal out of the ground. That constant battle between current gold prices and their so-called “all-inclusive cash cost” has been the major driving force in their performance during the Great Recession and after.
And currently as they say “the rent is too darn high.”
Higher labor rates, fuel and energy costs, environmental abate and even rising royalty schemes for various governments have continually moved the cost of production higher over the last decade. This wasn’t so much a problem when gold prices where through the roof. However, when gold bottomed out at around $1,110 per ounce, it became kind of big deal for many miners.
Subsequently, shares prices for miners plunged. The NYSE Arca Gold BUGS Index, which is the major benchmark for the senior and top-tier gold producers, fell about 80% from peak gold prices. The juniors and smaller exploration did even worse, with many ceasing operations and trading of their equity.
It’s enough to make a gold bug cry.
But here’s the thing — like what is going in the oil and gas sector, the major gold miners are adapting to the new era of potentially lower gold prices. Albeit, it’s taking them a lot longer to turn the ship around than the frackers.
Capital expenditure budgets are being halved, new ambitious projects are being shelved and costs are being reduced — so much so that many of the mega-miners and larger gold stocks cash costs are in the $800- to $900-per-ounce range.
That makes them still profitable with gold at current prices. And it seems to be stuck within a relatively tight trading range as lower supplies (thanks to the CAPEX cuts) have been met with steadily rising demand (thanks to gold buying in China, India and Russia).
This the kind of stability that investors want and that begs for continuously churning out cash flows and earnings. Are the miners making as much as $1,800 per ounce gold? Nope. Are they starting to grind forward? Certainly.
And could make the larger gold stocks a big buy for investors looking to profit from the next leg up in gold prices. You know, when we hit the next recessionary period in our economic expansion.
Now let’s look at three gold stocks to buy:
3 Gold Stocks To Buy
Investors shouldn’t just add any miner to their portfolios. Again, finding those who can make money with current gold prices is the key — and the trio of Goldcorp (GG), Barrick Gold (ABX) and Yamana Gold (AUY) are the three to buy.
Goldcorp: GG has always been the poster child for low-cost production. And while its all-inclusive cash costs did increase slightly during its latest earnings report, GG is still one of the low-cost leaders. That number currently sits at $885 per ounce.
However, some its larger legacy mines push that number down to the $740 per ounce. Recent CAPEX cuts of around 44% will help lower costs even further. That means that GG is still kicking out cash flows with gold in the $1,100 to $1,200 range.
Cash flows help pay out GG’s 3.5% monthly dividend, which has more than tripled over the last five years.
Barrick: ABX maybe the world’s largest producer of gold, but you wouldn’t know it when it comes to its share price. ABX has been one of worst-performing mining stocks around. But the poor performance hasn’t come from a lack of production or even its all-in cash cost, which is about $860 per ounce.
Instead, the poor stock performance is a result of its $13 billion in debt, which was created when ABX launched a series of high-profile mega-mergers during the boom years.
However, investors may still want to consider the gold stock. ABX has been a huge CAPEX reduction program that diverts more capital to lower cost regions. Additionally, Barrick has been working hard to reduce its debt via asset sales and is on track to clip about $3 billion from its load at the end of the year.
As potential turnaround play, ABX could be the perfect complement to a portfolio.
Yamana Gold: Mid-tier producer AUY shows exactly what is possible in the gold mining sector. Following a recent joint venture buyout of Osisko Mining, AUY has seriously reduced its costs down to $895 per ounce.
Around this time last year, it was more than $1,030. That reduction in costs was driven by the buyouts addition of the world-class Canadian Malartic mine to AUY’s asset pool.
Rising cash flows and production from the addition of that mine regain its former mojo even if gold prices don’t rise further. The 1.6% dividend helps investors ride out any rough patches.
The Bottom Line
Cash costs for the major gold stocks continue to fall in the face of relatively steady gold prices. For investors, that means it could be time to pick up shares of some of the larger mining stocks.
The trio of GG, AUY and ABX are great picks in the sector.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
