With serious inflation still only a gleam in the eyes of the ardent gold bugs, 2014 looks like a tough year for gold miners. The metals analysts at J.P. Morgan think it is easy to look at the cost of new mines and conclude that current prices are unsustainable. But new mine projects may not be needed for several years if more of investors’ above-ground gold horde is unwound. Here is where the story gets more interesting.
For many on Wall Street the question of future inflation is a when, and not if, proposition. Central backs around the world are printing money at a furious pace, debasing the value of their local currency. So whether it is a question of gold and silver as a hedge, an industrial commodity or simply a straight contrarian stock trade, the J.P. Morgan team thinks now is the time to look hard at the top names. They also think the downturn in prices has created a golden opportunity.
J.P. Morgan has six top names for 2014 for which investors may buy the stocks at rock-bottom prices.
Compania de Minas Buenaventura SAA (NYSE: BVN) is Peru[s largest mining company. The company has seen its stock fall a whopping 70% on the year. Buenaventura’s dealt with problems from a workers’ strike back in October to plunging sales and earnings recently. The J.P. Morgan analysts feel that, after the company’s third-quarter results, the miner of gold and other metals could be due for a long-term turnaround by finishing several projects this year, including a manganese plant that should help to push down rising costs. Investors are paid a tiny 0.2% dividend. The J.P. Morgan price target for the stock is $19. The Thomson/First Call estimate is at $18.45. Compania Buenaventura closed Friday at $10.64. A move to the target price would represent a gigantic 72% move.
Eldorado Gold Corp. (NYSE: EGO) owns Kisladag, the largest gold mine in Turkey. Over the past seven years, cash costs at Kisladag have fluctuated between $189 and $365 per ounce. Eldorado’s net income was down by 50% quarter over quarter, but still a positive $36.4 million. As a low-cost producer, partly thanks to heap leach mining methods, Eldorado was still able to scrounge up $0.12 to be distributed as a dividend for 2013. That translates to a 1.7% dividend for investors. The J.P. Morgan price target for the stock is $10, while the consensus is at $9.22. Eldorado ended last week at $5.49. A move to the target would be a huge 82% move.
Goldcorp Inc. (NYSE: GG) expects to start production at several mines in 2014. Goldcorp finished the third quarter with almost $1 billion of cash on hand and $2 billion of undrawn credit facility. Although capital expenditures outpaced cash flow from operations in 2013, Goldcorp remained on the conservative side. Its mine in Argentina Cerro Negro, which will produce 525,000 ounces of gold once it reaches full production levels, is expected to deliver first gold in mid-2014. The project was expected to start production by the end of this year but was delayed because of lower gold prices and inflation in Argentina. Investors are paid a 2.8% dividend. The J.P. Morgan price target for the stock is $34, and the consensus is posted at $33. Goldcorp closed Friday at $20.92. A move to the target would be a strong 60% gain for investors.
New Gold Inc. (NYSE: NGD) produced just 94,000 ounces in the third quarter of this year, compared with almost 105,000 ounces of gold in the same period of last year. Despite the lower output, the company reported revenues of $196 million and earnings of $51 million. As another low-cost producer, with a solid balance sheet, it should be able to weather the gold price decreases just fine. The J.P. Morgan price target for the stock is set at $8, while the consensus is posted slightly higher at $8.25. New Gold closed Friday at $4.91. A move to the target would represent a large 65% gain.
Newmont Mining Corp. (NYSE: NEM) is the largest and maybe the strongest of the stocks to buy at J.P. Morgan. The company’s assets or operations are located in the United States, Australia, Peru, Indonesia, Ghana, Mexico and New Zealand. As of December 31, 2012, it had proven and probable gold reserves of approximately 99.2 million ounces and an aggregate land position of approximately 29,000 square miles. Newmont was founded in 1916, so investors do not have to worry if the company will be around in the future. The company pays investors a solid 3.3% dividend. The J.P. Morgan price target is set at $28, and the consensus is higher at $31.25. Newmont closed Friday at $22.64.
Silver Wheaton Corp. (NYSE: SLW) is a stock that can deliver big results to the patient investor. Unlike other traditional miners, which spend copious amounts of money building out their mines, marketing their metal, and dealing with labor and administrative costs and repairs, Silver Wheaton does one thing and one thing only: buy royalty interests in mines at a fixed price. The company provides cash upfront to miners looking to expand or develop a mine and in return gets an extremely low fixed cost on some portion (or all) of the metal being produced at that mine. Investors receive a 1.7% dividend. J.P. Morgan has a $33 price objective and the consensus figure is at $29.50. Silver Wheaton closed Friday at $19.74. A move to the target would be a 65% gain for investors.
Contrarian investing has paid off big for patient investors. It can pay off even bigger when the whole world is negative on the asset class. Think about the end of the American dream of owning a home just a few short years ago. The major homebuilders traded in the single digits. Think about the banks and brokerage firms after Lehman Brother went bankrupt in 2008. Some stocks traded in the single digits. Nothing with any staying power goes out of favor forever. When inflation rears its ugly head after years of currency printing, the patient gold investors may again have their day in the sun.