Gold-Mining Stocks Finally Perk Up

 | Aug 16, 2013 | 11:30 AM EDT
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Is the long, dark night for gold-mining stocks finally coming to an end?

From Wednesday, Aug. 7, through Thursday, Aug. 15, Newmont Mining (NEM), the largest U.S.-based gold producer, climbed 25%. Barrick Gold (ABX) of Toronto, the largest producer in North America, advanced 27%.

These stocks have gone through a torturous ordeal. Newmont, for example, peaked at a little bit more than $68 in late 2011. Even after the past week's rally, it is at less than half that level now, around $33.

Barrick hit its high a few months earlier, at about $53. It now trades at about $20.

I was in both of these stocks last year, and that is one reason 2012 is a year I'd rather forget. I got out of the gold miners for most clients in January, and so far, that has saved them from considerable further damage.

Now the question is, should I get back in? And should you?

The gold miners have been struggling for a handful of reasons:

  • Gold has fallen in price to about $1,300 an ounce, from about $1,800 two years ago.
  • Energy costs are high, and it takes a lot of energy to move thousands of tons of earth to find a modest amount of gold.
  • New gold discoveries tend to be in out-of-the-way places, or deeply buried, or both, raising the cost of extraction, transportation and waste disposal.
  • Interest rates have been rising, making fixed-income investments more attractive to new buyers.
  • The U.S. economy appears to be improving, creating more opportunities to invest profitably in businesses (stocks and private equity) instead of a safe-haven metal.

Obviously, there will come a point when these risks are fully priced in and the stocks become buys. The question is, are we at that point?

The valuations on these stocks look good but not great. Newmont sells for 12x trailing earnings and 1.4x book value (corporate net worth per share). Barrick also goes for 1.4x book, but its price-to-earnings multiple is higher, at 33.

Earnings in 2012 are headed the wrong way fast. Analysts expect Newmont to earn only a dime a share this year, compared with $3.63 a share last year. At Barrick, last year's loss of $0.66 a share (in U.S. currency, not Canadian) is expected to widen to a loss of about $3.20 a share this year.

For next year, analysts anticipate an earnings recovery. For Newmont, for example, they say that earnings will go from $0.10 a share this year to about $1.86 next year. For Barrick, they anticipate a swing from a loss of about $3.94 a share this year to a gain of about $2.22 a share next year.

I would say the time to buy is near but not quite here yet. I would consider Newmont a buy if it falls to $26. Barrick would appeal to me when it has fallen to about $16 and when there is some indication that the company's earnings deceleration has run its course.

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