4 gold miners to consider for a rebound in gold prices

Have we hit the bottom?

Darryl Daté-Shappard

I started investing after finding a copy of Peter Lynch's "Beating the Street" in the English book section of a library in Japan, where I was living at the time in 1997. Seeing that regular people can find investment ideas just as easily as professionals, I used the philosophy of that book to invest in stocks in Japan, and later in Australia after moving in 2001. I also have experience in property investing, and went on to complete my masters degree in Applied Finance at QUT in Brisbane. I follow the investment style of Peter Lynch, Phillip Fisher and Warren Buffett-- knowing what you invest in, doing your homework to keep up with a stock's story and holding a healthy skepticism of what the stock market calls "value".

Published August 20, 2013 10:38 am AEST

Gold prices have dropped as much as 36% from the August 2011 high of about US$1,900 per oz. Gold mining stocks have been pummeled even more. Once a safe haven from GFC fears, gold has turned into a much less desired asset since the financial markets have recovered.

Since the start of July, gold has recovered 14%, and if the great sell-off has passed and investors may start filtering back in, could these miners also benefit and rise in price themselves?

To know which miners have the stamina and strength to take the hits, we need to know their production levels and the total cash cost of gold production. Each mine site may vary, but the mining company will have a total cash cost of how much it takes to produce the gold they have. When that cost exceeds the price of gold, then it isn't economical to keep up production. Companies begin to cut back on work and staff, and huge write-downs in assets occur. Since 2011 Alacer Gold (ASX: AQG) had fallen from $10 to $2, AngloGold Ashanti (ASX: AGG) down from $9 to $3, Kingsgate Consolidated (ASX: KCN) down from $12 to $1.50, and Newcrest Mining (ASX: NCM) down from $40 to $10.

Alacer has one mine in Turkey with a total cash cost of $395/oz, so that is still in the money. Unfortunately, it had to discontinue its Australia-based mining because there the cost is $1,268/oz. Kingsgate's mine in Thailand has a cash cost of US$686/oz, so it is still profitable. AngloGold came in at $920/oz. Newcrest has a variety of mines, but in its 2013 annual report it stated that the company expects to be free cash flow neutral or positive at a gold price of A$1,450/oz in the 2014 financial year.

Which of these can weather the storm better until gold rebounds more? Alacer and Newcrest may be worth watching. Alacer has a low gearing ratio of about 5% and current ratios are stable above 1. Newcrest has an acceptable 41% gearing and stable current ratio, and the share price is now below book value ($12.57 vs $12.97) after a massive $6.2 billion write-down on assets.

Foolish takeaway

It has been a harsh time for these miners, but as investors, now is the time to decide whether they have been beaten down too much, and real value is evident. Gold has corrected once in 2006 and another in 2008 only to hit new highs later. With more favourable gold prices, you may be able to buy at rock-bottom stock prices. Mining can be speculative and cyclical, so the best time is when the industry is unattractive in the market.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.

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