With gold prices beaten down, now might be a great time to look at undervalued gold stocks.
Gold Prices Under Pressure
After a meteoric rise to $1,923 per ounce, gold prices have come under serious pressure. Currently trading near $1,150 an ounce, gold prices are being held back by “improving” economic indicators, low interest rates, and record stock market levels.
While investors like to strike when the iron is hot, it might be a better idea to strike while it’s cold. Why? Because the factors holding the price of gold down are not as stable as you might think.
For the most part, investors like to hold precious metals like gold and silver as a hedge against uncertainty. Because the economy and stock market are doing well, investors see no reason to hold gold. But there are more than a few good reasons why investors may want to consider gold stocks over the long haul.
Underlying U.S. Economy Unhealthy
The talking heads might tell you the U.S. economy is experiencing consistent growth, but all is not what it seems. The unemployment rate may be down around 5.6%, but the fact remains that most jobs being created are part-time and low-paying. The underemployment rate is at 11.0% and has been at that level or above since 2008.
Americans are also increasingly pessimistic about the state of the U.S. economy. That’s not really a surprise when you consider that U.S. wages are stagnant and debt levels are up; this might also explain why U.S. retail sales have been disappointing. Low oil prices were supposed to help boost consumer spending; that hasn’t happened. All of this isn’t the best news for a country that gets 70% of its gross domestic product (GDP) from consumer spending.
Thanks to lower unemployment data, it is expected that the Federal Reserve will start to raise interest rates in the second half of this year. This is more bad news for the U.S. economy. Rising interest rates will put pressure on Americans who have taken on more debt over the last number of years. It will also increase the cost of borrowing, which is expected to negatively impact corporate America.
Rising interest rates are also bad for investors. Artificially low interest rates have been fuelling the stock market higher since early 2009. Look where it’s gotten us, though. According to the CAPE ratio (a valuation measurement) of the S&P 500, the stock market is overvalued by 68%. (Source: Yale University web site, last accessed March 17, 2015.)
The ratio currently stands at 27.85; that means that for every $1.00 of earnings a company makes, investors are willing to pay $27.85. The last time the ratio was near this level was in late 1999—right before the dot-com bubble burst.
The stock market is only as strong as the stocks that go into making it up; and stocks are only as strong as the economy supporting them. Neither the U.S. economy nor the global economy is doing that well.
What about U.S. housing? Prices are still 15% lower than they were before the Great Recession, and 5.4 million homes, or 10.4% of all homes with a mortgage, are still in a negative equity position. On top of that, of the 50 million U.S. homes with a mortgage, roughly 20% have less than 20% equity. Existing-home sales, the backbone of first-time home buyers, are slumping. (Source: Yahoo! Finance web site, last accessed March 17, 2015.)
Top 4 Gold Stocks to Watch in 2015
For investors who like to have a balanced portfolio, here is a list of four gold stocks you may want to consider doing further due diligence on this year.
Top Gold Stock #1: Barrick Gold Corporation (NYSE/ABX)
With a market cap of $12.0 billion, Barrick is one of the biggest gold mining stocks in the industry. The company has proven and probable reserves of 93 million ounces of gold, 888 million ounces of silver, and 9.6 billion pounds of copper. (Source: Barrick Gold Corporation web site, last accessed March 17, 2015.)
In 2014, Barrick produced 6.25 million ounces of gold at all-in sustaining costs of $864.00 per ounce. In 2015, the company expects all-in costs to be between $860.00 and $895.00 per ounce. Regardless of where gold prices are in 2015, Barrick has the infrastructure in place to remain profitable.
Currently sitting near $10.30 per share, Barrick is trading at levels not seen since 1991, making it one of the best gold stocks to watch this year.
Top Gold Stock #2: Richmont Mines Inc. (NYSE/RIC)
Richmont Mines is a gold mining stock that develops properties in Canada. The company has proven and probable reserves of 217,950 ounces of gold. Richmont also has measured and indicated resources of 1.8 million ounces and inferred resources of 2.7 million ounces.
Currently trading at a support level near $3.00, Richmont’s share price has soared more than 190% since the beginning of 2014. Most recently, in mid-February, the company announced that full-year gold sales of 94,503 ounces were up 49% over its 2013 levels, with an annual cost per ounce of CDN$956.00 (US$866.00), 15% below 2013 levels. (Source: Richmont Mines Inc., February 19, 2015.)
In 2014, the company had sales of 94,503 ounces of gold, a 49% increase over the 63,443 ounces in 2013 and a 55% increase over the 60,741 ounces in 2012. Overall 2014 revenue was up 47% year-over-year at $132.2 million. Most significantly, net earnings from continuing operations came in at $8.2 million, or $0.18 per share, notably above the 2013 net loss from continuing operations of $33.2 million, or ($0.84) per share.
Top Gold Stock #3: Yamana Gold Inc. (NYSE/AUY)
Yamana Gold has precious metal properties and land positions throughout the Americas, including in Brazil, Chile, Argentina, and Mexico. The gold mining company has total proven and probable reserves of 19.6 million ounces of gold, 110 million ounces of silver, and 2.9 billion pounds of copper. (Source: Yamana Gold Inc. web site, last accessed March 17, 2015.)
In February, Yamana Gold continued its trend of sequential quarter-over-quarter production increases and delivered record annual production. The company announced that full-year production increased 17% year-over-year to a record production of more than 1.4 million ounces of gold equivalent and 133.5 million pounds of copper. All-in sustaining cash costs for 2014 came in at $807.00 per ounce of gold equivalent. (Source: Yamana Gold Inc., February 11, 2015.)
In 2015, the company expects gold production to increase nine percent year-over-year, for 1.3 million ounces of gold, silver production to hit 9.6 million ounces, and copper production to come in at 120 million. Yamana expects to report all-in costs of between $800.00 and $830.00 per ounce of gold and between $9.50 and $9.80 per ounce of silver.
Top Gold Stock #4: Sandstorm Gold Ltd. (NYSE/SAND)
Sandstorm Gold isn’t technically a gold mining company; it’s more the money behind gold mining stocks. Sandstorm Gold provides financing to gold mining companies, primarily in Canada, Mexico, and Brazil.
Through stream and royalty financing, Sandstorm makes an upfront payment to a mining partner that is in need of capital for building its mine, refinancing its obligations, completing an acquisition, or for various other reasons.
In exchange for that upfront payment, Sandstorm receives the right to purchase a percentage of a mine’s gold production at a fixed price per ounce (e.g., $400.00/oz). With a gold royalty, Sandstorm receives a portion of the revenue generated from a mine’s operations. Since 2009, Sandstorm has compiled a portfolio of 57 streams and royalties, of which 14 of the underlying assets are currently producing gold. (Source: Sandstorm Gold Ltd. web site, last accessed March 17, 2015.)
In February, Sandstorm Gold announced it met its 2014 production guidance, with 44,821 attributable gold equivalent ounces sold during the year. Revenue and cash flow from operations for 2014 were $56.5 million and $35.2 million respectively. (Source: Sandstorm Gold Inc., February 23, 2015.)
Based on the company’s existing gold streams and royalties, attributable gold equivalent production for 2015 is forecasted to be between 36,000 and 44,000 ounces, increasing to 45,000 ounces per annum in 2018. Sandstorm is expecting to release its 2014 fourth-quarter and annual results by March 31, 2015.