Why Value Investors Must at Least Start to Look at Mining and Metals Stocks

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There are a variety of ways to invest in precious metals. Buying gold or silver bars and coins is one. Exchange traded funds (ETFs) are another. A third way is by investing in mining stocks. The past year has not been kind to either the price of gold nor to the miners. The steep losses in the mining sector stocks have become so sharp that value investors have to at least take a look at this down-and-out mining sector.

24/7 Wall St. has taken a look at the actual metals and other methods of investing in or around this theme. It leaves room for gold and silver miners, exchange traded funds and products, and even directly holding the metals.

Commodities

Direct investment in commodities metals is not for the faint of heart. Gold, for example, has dropped more than $200 an ounce since the beginning of the year, a loss of about 13%. Silver has fared even worse, dropping around $8 an ounce, for a loss of around 26%. Platinum is down about 10% and palladium, bucking the trend, is up around 6%.

Gold bar and coin demand rose 10% in the first quarter of the year, while ETFs experienced a drop of more than 7% in the quarter. Some analysts attribute that switch to a loss of faith by investors in paper money and in the banks and financial institutions that back all that paper. Gold demand from central banks also fell by 5% in the quarter

Lower gold (and silver) prices in the first quarter also drove demand from jewelry buyers, which rose by 12%. Because this demand was driven by price, when the price begins to rise again, we can expect this demand to fall.

Exchange Traded Funds

The SPDR Gold Trust (NYSEMKT: GLD) and the iShares Silver Trust (NYSEMKT: SLV) are perhaps the best-known of the precious metal funds. In the past 12 months, shares of the former have dropped more than 11% and shares of the latter have lost nearly 7%. Neither of these can ever really be considered a value play, but that is not why people invest in precious metals ETFs in the first place.

Mining ETFs include Market Vectors Gold Minters ETF (NYSEMKT: GDX), Market Vectors Junior Gold Miners ETF (NYSEMKT: GDXJ) and Global X Silver Miners ETF (NYSEMKT: SIL). Over the past 12 months, shares are down from about 26% at SIL to more than 42% at the junior miners ETF. Whether now is the time to “buy the dip” in these funds is left as an exercise for the reader. To help with that exercise, we have looked at a number of precious and base metals mining stocks with an eye toward spotting a hidden value or two.

Precious Metals Mining Companies

The issues facing the world’s mining companies are well known: rising costs, labor troubles and diminishing ore quality get most of the blame for the mining industry’s poor showing in 2012. Add to that a several-years effort by mining executives to add to reserves by paying top prices for new resources. That buying spree cost several top CEOs their jobs. Now the mining industry has turned almost 180 degrees and is focusing on creating value for shareholders with a tighter grip on capital spending and better returns on investment. Call it the financialization of mining.

Barrick Gold Corp. (NYSE: ABX) recently traded at $19.16 after news of Chilean mining woes took some steam out of this miner. In early February, shares closed at around $32.75, marking a drop of about 41%. Barrick now has a market value of about $19.2 billion. The consensus target price from Thomson Reuters is $32.30, and the 52-week range is $17.51 to $43.30. Barrick has a dividend yield of 4.3%, up from 2.4% in February. The upside implied by the consensus target is nearly 69%.

Goldcorp Inc. (NYSE: GG) recently traded at $26.83, versus $36.20 back in February, meaning the shares have fallen more than 25%. Goldcorp has a current market value of about $21.8 billion. The consensus target price is $39.30, and the 52-week range is $25.54 to $47.42. Goldcorp has a dividend yield of 2.3%, compared with 1.7% in February. The upside implied by the consensus target is about 46%.

Kinross Gold Corp. (NYSE: KGC) recently traded at $5.80, versus $8.30 in February, for a drop of about 30%. Kinross has a current market value of about $6.6 billion. The consensus target price is $8.50, and the 52-week range is $4.97 to $11.20. Kinross has boosted its dividend yield to 3% from 1.9%. The upside implied by the consensus price target is about 47%.

Newmont Mining Corp. (NYSE: NEM) recently traded at $32, versus $45 in February, making the loss almost one-third. Newmont has a market value of about $15.9 billion. The consensus target price is $42.45, and the 52-week range is $30.30 to $57.93. Newmont has a dividend yield of 4.6%, although the company did tie its dividend payouts to the price of gold in the past. The upside implied by the consensus target is about 33%.