Miners have been out of favor with investors for the past year or so as the falling price of gold and continual write-downs have sent stock prices to rock-bottom levels. However, while the majority of the sector is useless, with most companies suffering horrendous cash burn and rising debt, there are a few diamonds in the rough.
The tiny South African producer
Harmony Gold Mining Co. (ADR) (NYSE:HMY) is cash-flow positive, which is a very rare occurrence among gold and silver miners nowadays. Adjusting for financing activities, Harmony produced a free cash flow of $143 million during Q1 this year and $174 million for the whole of 2012. This strong free cash flow has allowed Harmony Gold Mining Co. (ADR) (NYSE:HMY) to improve its total net cash position from $20 million to $62 million over the last five quarters alone.
Still, while Harmony Gold Mining Co. (ADR) (NYSE:HMY) is cash generative, the company is still a relatively high-cost producer with all-in costs averaging $1,446/oz. for the first six months of the year. To some extent, losses have been cushioned by a falling rand. In particular, during the first quarter, the average gold price fell 5% while the company’s realized gold price in rand fell only 2%. Management is proactive, however, and is driving to cut costs by 20% based on the falling price of gold.
The century-old US silver producer
Hecla Mining Company (NYSE:HL) is another diamond silver producer. The company is over 100 years old. It has been extremely fiscally prudent over the past five years while many other miners have been spending rapidly to boost production while precious metals prices were high. However, Hecla Mining Company (NYSE:HL) is now using its saved cash reserves to acquire struggling competitors. In addition, the company recently issued $400 million in debt, but demand was so high that the issue was increased by 20% to $500 million; rising demand for debt issuance, especially for a silver miner in these troubled times, signifies solid confidence.
Hecla Mining Company (NYSE:HL)’s patience shows in its recent acquisitions. Aurizon Mines, owner of two gold mines in Canada, was acquired for a total of $796 million, a 40% discount to the company’s valuation at the peak of the gold boom in 2011. Moreover, Aurizon is a low-cost gold producer, with the all-in cost averaging $1,147 per ounce, which should significantly boost Hecla’s overall profitability.
Hecla Mining Company (NYSE:HL) is trading at its lowest valuation in 35 years and the company trades at a 20% discount to the value of its net asset value. I estimate debt will be around 40% of equity for this year thanks to the recent Aurizon acquisition, but this level appears sustainable based on the low rate of interest <5% that Hecla Mining Company (NYSE:HL) is paying and high demand for the company’s debt.
One company to avoid
On the other hand, IAMGOLD Corporation (USA) (NYSE:IAG) is a company to avoid. The company’s financial position is rapidly deteriorating. Net cash has fallen from $1 billion during the first quarter 2012 to only $10 million during the first quarter of this year. At the same time, the company has only achieved a modest improvement of shareholder equity of about 3.4% although liabilities have exploded 83% in the five-month period. The company has been hemorrhaging cash to the tune of $250 million a quarter for the last five quarters and at this current rate, cash will be wiped out by the end of this year and the company will have to increase borrowing.
Moreover, the company is highly geared on an operational basis. A 14% fall in the realized gold price during the first quarter led to a 91% decline in net attributable earnings (on an adjusted basis this was a 37% decline). This decline was based on an average realized cost of $1,631; further losses could be round the corner. Indeed, IAMGOLD Corporation (USA) (NYSE:IAG)’s all-in cash costs are expected to be around $1,200 to $1,300 for this year, indicating that some of the company’s production could already be cash-flow negative.
Foolish summary
All in all, two out the three companies above look to be good plays on the currently undervalued mining sector Both Hecla and Harmony have cash-flow positive operations and strong balance sheets, coupled with their low valuations and discount to book value, these companies appear to offer good reward for little risk.
IAMGOLD Corporation (USA) (NYSE:IAG), on the other hand, is rapidly going downhill and the company should be avoided based on its cash burn and collapsing earnings.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Two Miners to Buy and One to Sell originally appeared on Fool.com and is written by Rupert Hargreaves.
Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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