ANV, RGLD, NEM: Is Value Emerging In Gold Mining Firms?

ANV, RGLD, NEM: Is Value Emerging In Gold Mining Firms?
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The sell off in gold must be still fresh in investors minds as it had a significant bearing on stock markets as well. The Cyprus inflicted panic shaved substantial valuations in gold mining firms such as Allied Nevada Gold Corp. (NYSEAMEX:ANV) (TSE:ANV), Royal Gold, Inc. (NASDAQ:RGLD) (TSE:GLD), and Newmont Mining Corp (NYSE:NEM), which begs the question if this is the right time to start buying shares in a depressed market. Here is a closer look:

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ANV, RGLD, NEM: Is Value Emerging In Gold Mining Firms?

Allied Nevada Gold Corp. (NYSEAMEX:ANV) (TSE:ANV) is a producer of gold and silver and as prices of both precious metals have crashed, the stock has been at the receiving end of the market, losing consistently since November. The sell off has caused a value erosion of over 65 percent so far in 2013. There is still no telling if this is the bottom but the stock certainly looks attractive at a forward price earnings ratio of 4.2.

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It is worth noting that this valuation is based on financial models which have already factored in the expected weakness in gold prices. As such, the surprises in terms of a further drop in gold prices are expected to be limited. This effectively means that unless the company flounders big time on operational issues, its profits are likely to be flat. Since the company is in expansion mode, it is not surprising to see the effect of lower gold prices being offset by higher production to a large extent. This is what happened in the quarter ended December 31, 2012 when revenues doubled.

Royalty interest is the way forward

Royal Gold, Inc. (NASDAQ:RGLD) (TSE:GLD) is down 18 percent since last Friday, while losing 34.6 percent from January. The company is not a mining firm and largely operates through acquiring royalty interest in existing projects. As on December 31, 2012, the company had interests in 39 producing properties, 28 development stage properties and 138 exploration stage properties and had nearly 60 percent of its revenues coming from North American markets.

It is not that falling gold prices does not affect the company, but a non-mining business model at least keeps variable costs out of the equation. This was probably the reason why it was given a ‘Buy’ rating last month by BB&T Capital Markets with a target price of $85, reflecting huge upside considering its current price of $51.6. In addition, a less leveraged balance sheet is a net positive to take the stock higher as and when gold prices recover.

Colorado based gold producer Newmont Mining Corp (NYSE:NEM) offers an exceptional dividend yield of 5.25 percent at current market price of $32.6. The stock has lost 15 percent in the last 5 days, while losing 27 percent so far in the year. Needless to say, current levels are the lowest in the last 52 weeks. The downside for this stock may be limited by the fact that the stock is trading at a premium of just 17 percent to the net value of the company’s assets.

A price earnings ratio of 8.6 is attractive but more than this, operational updates from the company would likely drive the stock in future. Newmont has a 44 percent interest in La Herradura joint venture, which is building an oxide mill to improve recoveries on higher grade material. This is expected to be completed in the second half of 2013.

Overall, it is difficult to say if we are out of the woods yet and we are probably not, but precious metal prices have moved in oversold territory and can surprise on the upside. The negative sentiment for gold is not exactly as strong as it appears. If slowing economic growth across the world follows Europe, we may see a revival in gold prices which has worked as an excellent hedge in recent decades.

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