Maybe you have heard the phrase “There’s gold in them thar hills.” It turns out that 2016 has seen a massive rally in gold, and this has been a leveraged move in the world’s gold miners rising to the upside. The reasons for this surge are numerous. Still, let’s just say that this was the exact opposite move of what the consensus pack was expecting at the end 2015, when the risk was there that gold could even go well under $1,000 per ounce again.
24/7 Wall St. wanted to see if there was still any value among the top gold-mining stocks. It turns out that there may still be considerable value, but this is an instance where beauty is in the eye of the beholder. We screened out the small cap stocks, those with a market capitalization under $1 billion, to avoid the most speculative names. Then our main focus went to book value, and five of the top gold-mining and production stocks were still valued at less than 1.0 times book value.
In an effort to screen out some of the royalty companies and other non-core companies, we went ahead and screened for the price-to-sales ratios to make sure that investors were really evaluating gold companies with hard assets rather than fixed financial claims tied to gold.
Before blindly thinking that these are cheap no matter what, it is important to understand that many gold-mining and production stocks have more than doubled year to date. Of these five under book value, the lowest year to date gain is 40% and the highest is 274%.
Investors also need to understand one very important thing about book value. It can make a company look cheap, but it also can be mispriced to the current market. In the case of gold-mining outfits, many of them are basing the value of their estimated reserves and metals in the ground at various gold prices. Every company also has a very different cost of mining, another reason we included a price-to-sales ratio.
The long and short of the matter is that if these companies were theoretically to come up for sale they might not fetch the full book value or might not fetch any premium at all. As you will see, some of these gold stocks have rallied to the point that they are now well above their consensus analyst price targets.
Due to so many factors outside of a company’s control, we did not include current or future price-to-earnings (P/E) ratios. There are just too many factors to consider, from geopolitics to employee strife and even floods or accidents. Still, these companies are mostly expected to be profitable, but be advised they might not look cheap on a raw earnings valuation basis.
Some companies are involved in selling or acquiring gold and other mineral projects. That can greatly change their book values. It can also mean that some of these descriptions or underlying book values might be partly off base. With most gold companies being international (none of these five are based in the United States), there can also be wild swings in valuation due to currencies and other considerations.
The market cap of Yamana Gold Inc. (NYSE: AUY) was last seen at $4.67 billion, despite such a low share price. Yamana is valued at 2.60 times sales and 0.94 times book value. It has seen its shares rise 160% year to date. And it had an operating earnings-per-share loss of $0.08 in 2015, but the increase in revenues is expected to generate profits of $0.11 per share in 2016 and $0.13 in 2017.
Yamana Gold is based in Toronto, Canada. Its precious metal properties are located in Brazil, Argentina, Chile, Mexico and Canada.
Shares of Yamana Gold were last seen trading at $4.78, and the consensus analyst price target of $4.60 is less than the current share price. The stock has a 52-week trading range of $1.38 to $5.38.