Precious metals prices are perking up. That said, let's devote some time to gold and silver.
Of course, the past two years have not been kind to our favorite precious metals. Gold is selling near $1,390 per ounce. Silver hovers near $24 per ounce. Both price levels are dramatically down from August 2011, when gold traded over $1,900 and silver was over $40.
Times are tough for miners. Costs are high. Metal prices are low. Share prices and market capitalizations are in the pits, so to speak. Overall, sentiments toward the mining sector are negative. The "commodity super-cycle is over," if you believe the headline writers of the Financial Times or The Economist.
Still, with a recent upturn in metals prices are there opportunities in this scenario?
I believe there are still some bargains out there—and if metals prices inch higher over the coming days and months, a few well run miners should pay off handsomely.
Consider one company that knows how to do things right during hard times. That's Agnico Eagle Mines Ltd. (AEM). Agnico shares trade near $30, far down from $55 in December 2012 and a big tumble from over $70 two years ago, in 2011. In a negative gold market, Agnico is among the best speculative buys. If gold markets revive, then Agnico should be one of the fastest horses out of the gate. Oh, and while you wait, the dividend yield is a respectable 3%.
Here's the background. Agnico suffers from the same cost and price issues that afflict all miners. Indeed, Agnico just announced a hit to its bottom line in the second quarter of 2013. Lower earnings reflect the company's sale of gold at an average price of $1,336 per ounce, versus $1,602 during the same period last year—a 17% decline in sales price.
In response, Agnico management is cutting spending and costs by $50 million for the rest of 2013, and chopping another $200 million in 2014—the latter number is way down from a previously programmed level of $600 million. At the same time, though, Agnico plans to remain aggressive when it comes to acquiring stakes in junior companies with promising early-stage projects. Keep the seed corn, so to speak.
Management's immediate goal is to keep the balance sheet healthy if gold stays in a bear market. It's called capital discipline. According to Agnico CEO Sean Boyd, "We've been through a lot of these types of volatile environments. We've found it's always good to be prudent in uncertain times to make sure we control our destiny."
In a positive sign, Agnico is maintaining investor guidance for the next three years — aiming to produce at least 970,000 ounces this year and 1.2 million ounces by 2015. That is, most announced spending cuts aren't operational, but instead are capex deferrals. Agnico is cleaning up its balance sheet by not spending money on long-term projects that are still on the drawing board. But it'll keep mining what's in the project pipeline.
Another company with smart guys running things is Goldcorp (GG).
The company's assets include mines in Canada, the U.S., Mexico and Argentina. Goldcorp shares trade at $29, close to their four-year low, with a dividend yield of 2%. As with Agnico, Goldcorp is a solid speculative buy, even in a "down" gold market. If gold markets begin to revive, then Goldcorp is also a fast horse on the track.
Goldcorp recently reported a second-quarter loss of $1.93 billion, mostly due to writing down exploration potential of its Penasquito asset in Mexico. It's a noncash charge, but embarrassing for Goldcorp management, which prides itself on getting the geology right.
Meanwhile, Goldcorp is cutting $200 million of spending in 2013. Management announced that the company may close or scale back mines if gold prices sink below $1,200 per ounce. That, and Goldcorp cut administrative expenses. More of that capital discipline thing on display.
On a better note, Goldcorp finished its second quarter with about 14,000 gold equivalent ounces of unsold inventory at its Red Lake mine. That's positive, because the price of gold has improved recently.
Overall, Goldcorp is well run. Production has married up with past guidance. Goldcorp is on track to deliver 2.55–2.8 million ounces of gold this year, at a cash cost under $1,100 per ounce. It'll make money. Looking ahead, Goldcorp's growth prospects stand out, particularly in an industry where mines are depleting faster than m
Poster Child for Gold's Decline
Recently, credit rating agency Moody's warned that gold producers "must take action" to protect their ratings and minimize earnings deterioration. Of course, people who mine everything—iron, copper, zinc, potash, you name it—must slash costs. Still, it's fair to say that the Moody's advice pertains strongly to gold and silver players because of the rapid decline in precious metals prices.
Along these lines, look at Barrick Gold (ABX). Barrick's share price was $55 in August 2011, but now trades in the $19 range. Indeed, Barrick is a poster child for investment disappointment. Looking ahead, the good news is that Barrick will likely benefit from any rise in the price of gold. But right now the bad news is that Barrick is a high-risk play in a low-price gold environment. It all depends on the price of gold.
In the past, I've said favorable things about Barrick. I expected better from the company. At least, I expected some of that capital discipline stuff that past management promised. Much to my chagrin, however, we've seen bosses come and go, but not much in the way of long-term capital discipline. Now there's little to show at "Big Barrick" other than a near-Detroit level of debt, about $14 billion. Thanks, guys.
That, and Barrick holds an overvalued menu of high-risk projects—reflective of shoddy and incompetent de-risking by management. Look at, say, Barrick's Pascua-Lama project, on the border of Argentina and Chile. It's one delay after another, with big cost overruns that Barrick management failed to anticipate—although they have no qualms about blaming "the engineers." (Tawdry, no?)
Finally bowing to reality in early August, Barrick bit the balance-sheet bullet. The company wrote down over $8.5 billion, dismissed corporate staff and cut the dividend 75%, from 20 cents per quarter to 5 cents. Unlike Agnico or Goldcorp (see above), Barrick's last-ditch financial engineering might not be enough to keep the ship afloat, unless gold prices continue to rise. Indeed, looking ahead, I expect Barrick to sell off assets to raise cash, although across the industry, things are moving at fire-sale prices.
Here's another Barrick problem: Right now its fully burdened cost of gold production is in the range of $1,300 per ounce, which is too near gold's selling price for comfort, let alone profit. Looking ahead, Barrick is in deep trouble—as in Detroit-like trouble—if the price of gold declines further.
Frankly, the only reason I see reason to hold Barrick is that I expect gold prices to recover. That rising tide will lift many boats—even Barrick's leaky hull.
Further to that last point, why should gold prices rise? Well, the shortage of physical gold is absolutely clear in the marketplace, and the price manipulation of the "paper gold" price is evident (more on that, soon). Thus, I believe gold prices will move upward and Barrick shares will recover some of the loss.
Barrick has painted itself into a tight corner long term. The company needs to cut more costs, sell assets, dig the high grades, pray for rising gold prices and be very lucky. Other than that, I hope you can see where this is going.
In the past month alone the companies listed above are up anywhere from 9–15%. Indeed, a turn higher for the price of gold will surely light a fire under the shares of these beaten down miners.
Byron King
Daily Reckoning
