A Value Walk Among Gold Stocks

June 2, 2014 by Jon C. Ogg

Gold is not having a good year again so far in 2014, and the recent trends from the World Gold Council seem to indicate that the old path to $2,000 gold is just not in the cards any time soon. But with the European Central Bank expected to adopt a zero-rate policy — or worse, negative rate environment — we wanted to take a look at how Wall Street is valuing the gold mining sector. Silver too.

Perhaps the biggest trick in valuing a gold miner or a gold royalty company is that you sort of have to have an idea of where the price of gold will be in a one-year to five-year horizon. Without an opinion on that matter, you quite simply have no way of valuing each company’s existing gold holdings and its reserve holdings in the ground that have not yet been mined.

Now we have to consider that some mining mergers have been pondered of late, a move that would allow some companies to focus on only their lowest-cost mining and production sites and idle or decrease production at their higher-cost sites. Newmont Mining Corp. (NYSE: NEM) and Barrick Gold Corp. (NYSE: ABX) were rumored to be in broken-down merger talks, and those talks could be rekindled under the right circumstances.

24/7 Wall St. has done a value review of several key gold (and silver, of course) mining and royalty players we follow. We have looked at what their stated book value is, as well as forward price-to-earnings (P/E) ratios for 2015. Also included is how the stocks have done, as well as where analysts think the stock is headed.

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Again, anything tied to gold royalties, mining and production is likely going to be associated with the price of gold. If gold falls to less than $1,000 by the end of 2015, then it is going to be a tough 18 months. But if gold stabilizes or rises, then these battered stocks may offer some value for selective investors.

Newmont Mining Corp. (NYSE: NEM) has a price-to-book value of 1.14 to 1. Newmont’s market cap is almost $11.5 billion and its forward P/E is about 16. With a consensus target price of $26.74 from Thomson Reuters, Newmont has an implied upside of 17%. Its shares closed Friday at $22.89, and the 52-week price range is $20.79 to $35.44.

Barrick Gold Corp. (NYSE: ABX) has a 1.38-to-1 price-to-book value ratio. Its market cap is $18.76 billion, and its forward P/E is less than 13.5. Barrick shares closed at $16.11, and the 52-week trading range is $13.43 to $21.68. With a consensus target price of $20.50, Barrick has an implied upside of 27%.

Silver Wheaton Corp. (NYSE: SLW) is of course more silver than gold, but the company has tried to get more gold into its mix. We think that will continue ahead, particularly if the company can make selective acquisitions along the way via operational purchases or royalty purchases. Silver Wheaton posts a 2.14-to-1 price-to-book value ratio, which is higher than its peers. Its market cap is $7.34 billion, and it has a consensus target price of $30.29. Silver Wheaton closed at $20.54 and the 52-week trading range is $17.75 to $29.17. Silver Wheaton has significant upside of 47% if the analysts are correct.

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Goldcorp Inc. (NYSE: GG) screens out as a “value stock” with a price-to-book value ratio of 0.97 to 1 — a discount to book value. Its market cap is $19.00 billion, which means that it may be too big for an acquirer. Another issue is that its forward P/E of 22 makes it one of the more expensive gold players (assuming analysts are right). Goldcorp shares closed at $23.37, and the 52-week trading range is $20.54 to $32.15. With a consensus target price of $30.12, Goldcorp has an implied upside of 28.9%.

Royal Gold Inc. (NASDAQ: RGLD) posts a 1.74-to-1 price-to-book value, but this is a royalty player rather than an operator in gold itself. Its market cap is $4.1 billion, and its forward P/E is roughly 40. The issue with this high P/E ratio is that the estimates are based on a June year-end rather than a normal calendar year. Royal Gold shares closed at $62.72, and the 52-week trading range is $38.63 to $72.90. With a consensus target price of $75.16, Royal Gold has an implied upside of 20%.

What investors need to consider is that gold miners have almost unilaterally cut their dividends. The yields in most cases are now too small again to bother reporting. That being said, now you have a picture of how some of the North American gold and silver players are valued by Wall Street. There seems to be some opportunity here, as well as some risk.

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