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.
The gold miners
Kinross Gold Corporation (USA) (NYSE:KGC) 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 Corporation (USA) (NYSE:ABX) 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 Corporation (USA) (NYSE:IAG) 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.