Buy Gold Miners, Not Gold


Is it time to get back in the gold game? Miners have seen profits fall and many investors flee. Contrarians buy when others are fearful and sell when others are greedy. If you are looking for contrarian plays and have capital to spare, it is time to start examining gold miners.

Why buy miners instead of gold?
Gold is very volatile, and it is extremely difficult to predict medium-term prices. The World Gold Council's recent quarterly report shows quarterly gold ETF demand can easily fluctuate within a year. Volatile investor sentiment makes it very difficult to forecast medium-term gold prices.

The chart below shows how inflation increases at a dependable rate, while gold is far from stable. Miners can use hedging to remove gold's short term volatility, letting you invest based on relativity dependable annual production estimates.

Gold Price in US Dollars Chart
Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts

The gold miners

KGC Gross Profit (TTM) Chart
KGC Gross Profit (TTM) Chart

KGC Gross Profit (TTM) data by YCharts

Kinross Gold has seen its gross profit plunge thanks to $2.433 billion in impairment charges. Rising costs and falling gold prices have forced the company to revalue its projects. In Ecuador it decided not to proceed with its Fruta del Norte project, costing the company future revenue and a $720 charge.

Investors need to watch Kinross' revenue and gold production. If it cannot bring new projects online, its production and revenue will inevitably fall. A feasibility report on the potential expansion of its Tasist mill should come in by Q1 2014, but the company is so set on cutting costs that it may sacrifice the project. With writedowns, questions about production growth and its recent dividend cut, Kinross' stock will have negative momentum for some time.

Barrick Gold is bigger than Kinross and was not forced to cancel any big projects in Ecuador, but it has issues of its own. In Chile indigenous communities pushed back its Pascua-Lama mine, and now the company expects it will not finish the mine's water management system until the end of 2014. The positive side is that there is a good chance that the mine will eventually reach operation. Also, its 2013 production will be boosted by ramping up its Pueblo Viejo mine with an all-in sustaining cash cost below $600.

The downside is Barrick has a large debt load and a total debt-to-equity ratio of 1.17, but a significant portion of its debt will not come due until 2020 or later.

Two miners to consider
IAMGOLD has a low total debt-to-equity ratio of 0.18 and a number of mines looking for joint venture partners to help fund growth. One positive aspect of IAMGOLD is that its dividend yield is supported by cash flow from its Niobec niobium mine in Quebec, Canada. This non-gold income makes the dividend more stable than other 100% gold fueled dividends.

Its margins are not amazing, but in 2013 it expects to post all-in sustaining cash costs from $1,100 to $1,200 in its owner-operator mines. With a number of joint ventures waiting for partners and a small amount of debt, IAMGOLD is worth following as the market continues to punish gold miners.

Yamana Gold has all-in sustaining cash costs below $1,000, a small total debt-to-equity ratio of 0.11, and growing annual production that is expected to reach 1.55 million combined gold and silver ounces by 2015. Yamana has not been forced to take huge writedowns like its larger cousins, and yet its stock has still fallen by 50% in the past year.

For investors Yamana is a prime example that it is possible for a company to remain profitable, even in the presence of significant volatility. Yamana's smart mine development has given it a strong cost advantage and a clean balance sheet, good qualities for any long-term investment.

Final thoughts
Shopping around for quality contrarian gold plays is not too difficult. Low debt, good margins, and a growing production are the ingredients of a good miner. Yamana is a prime example of such a company. Lack of future growth makes Kinross risky, while Barricks' debt load should make investors think twice. Recent writedowns only confirm that contrarian investors can keep their capital safe by focusing on the highest quality miners.

An alternative play on gold
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