Gold has found its Glitter Again

Gold has been the runaway asset class this year but no one is really talking about it. Prices have jumped more than 7% to $1,321 an ounce and haven’t sold off in the face of declining volatility over the last couple of weeks. This is a good sign that investors are coming back to the metal, not only as a hedge on risk but also for fundamental reasons. While the price could come down if inflation data weakens, the miners are trading at or below book values and returns from price appreciation and dividends could make for good investments in 2014.

Newmont Mining (NEM) is one of the larger and more geographically-diversified operators in the industry with a market cap of $12 billion and operations in North and South America, Africa, and Asia-Pacific. This helps to reduce geopolitical risk from problems at any one mine or region, a nice benefit for shareholders in an industry that is concentrated in emerging markets.

Barrons recently posted an interview with CEO Gary Goldberg that defined the company’s strategy and outlook. The CEO admitted that production would probably be down this year on fewer new projects and an older mine portfolio. The bright spot was that he allayed fears of an equity or debt issue after the company’s $600 million in divestitures. This should drive some sentiment improvement and the shares could rally from here. Shares pay a 3.4% dividend yield and trade just above book value.

Yamana Gold (AUY) is a $7.9 billion Canadian miner with operations in Mexico, Brazil, Chile and Argentina. The company’s exposure to silver, copper, molybdenum and zinc help to buffer losses when gold prices fall so the stock may not be as volatile as pure-play peers.

Shares jumped on February 10th when the company said it would miss its 2013 production goal but that 2014 production was expected to increase by 16% from 1.2 million ounces to 1.4 million ounces. Management said that production issues at new mines was mostly to blame but that all mines were now producing on schedule. Cash costs were reported at $814 per equivalent ounce, which is well under current prices and lower than the industry average. Shares pay a 2.5% dividend yield and trade just above book value.

Buenaventura Mining (BVN) is possibly the most undervalued of the gold miners due to the selloff in emerging markets since the beginning of the year. Shares are slightly off their recent lows but are still 52% below the 52-week high established in early 2013. The majority of the decline is associated with the decline in gold prices but the company is also facing declining production in some of its largest mines.

Investing in Buenaventura is risky, not just on gold prices, but because all its assets are located in Peru. This sets investors up for a great deal of geopolitical risk. While the government has been relatively investor-friendly over the last several years, investors may want to limit their bet to a smaller percentage of the total portfolio. That said, the company trades for just 0.86 times book value and shares could perform significantly with the positive trend in gold prices.

Management recently cut the dividend to $0.01 per share, so it really doesn’t qualify as a dividend stock. The decision was made to protect cash flow and mirrors one made in 2009. After the 2009 cut, the dividend was quickly increased seven-fold. I am not expecting management to reverse their decision so quickly or by as much this time, but they have paid a dividend since 1996 and should return to dividend-paying status within a year.

It is always better to diversify your position within any one sector or industry so a basket of names is probably your best bet. You might even try adding a position in the Market Vectors Gold Miners ETF (GDX) for industry-wide diversification against a few individual holdings.


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