Martin Hutchinson writes: With the world's central bankers printing money like mad, you would think investing in gold mining stocks would be a no-brainer.
Yet despite these misguided policies, the Market Vectors Gold Mines Index (NYSE: GDX) is down 40% from its peak last September. Even worse, it's off 48% from its all-time highs in 2011.
Not even last Thursday's announcement that the Bank of Japan would buy $1.4 trillion in Japanese government bonds in 2013 and 2014 helped much-even though on a relative basis Japan's "stimulus" is more than double what Ben Bernanke has in mind.
So why all of the pain?...
And better yet, which gold mining stocks have fallen so far they are screaming buys right now?
Here's the answer to both questions....
Why Gold Miners are Down Right Now
First, there's the recent decline in gold prices. At today's price gold is close to 20% below its peak in the fall of 2011. In this case, it is simple: Lower gold prices = lower mining shares.
But even that doesn't quite explain the disparity between gold miners and the precious metal itself. The fall in miners' share prices has been much more pronounced than that of gold.
And it's not just their greater leverage to the price of gold that's responsible. Even in periods when gold prices have stabilized or shown moderate strength, gold mining shares have tumbled.
So what gives? The truth is not all gold miners are alike.
In fact, a substantial chunk of this can be put down to ineptitude and shareholder-unfriendliness among the mining companies themselves. For some, there have simply been too many equity raisings at fire sale prices. Too many new projects have run way over budget and resulted in existing shareholders being diluted to hell.
Take the Mount Milligan project of Thompson Creek Metals (NYSE:TC), for instance.
Because the project ran about 100% over the budgeted cost, the company was compelled to sell more than 50% of its projected output to "gold streaming" companies for a low price. It was then forced to carry out repeated dilutive equity issues which hammered the price.
Now even though Mount Milligan appears to be on track to open in September, TC shares are still standing at one quarter of their level two years ago.
Another problem for gold mining stocks is political risk.
Pan American Silver Corp. (Nasdaq: PAAS) for example, not only has almost 20% of its current production in Argentina, its largest capital expansion project in that country has been blocked by the regional government.
Likewise, Yamana Gold Inc. (NYSE: AUY) has an exciting $8 billion project located on the Argentina-Chile border. The problem is Argentina recently began blocking capital exports and has already nationalized a number of companies.
And since mining projects require a massive commitment of capital before resources start to flow, and are relatively cheap and easy to operate once the capital has been spent, committing shareholder resources to the tender mercies of Argentina's Cristina Fernandez is not something anyone should risk.
Then there's plain old cost escalation.
For example, IAMGOLD Corp. (NYSE: IAG) is a promising and growing gold miner with projects in a spread of emerging markets with only moderate risks.
Yet its mining cost rose from $643 per ounce in 2011 to $731 per ounce in 2012.
And while that may sound great given current gold prices of just under $1,600 an ounce, the industry's calculation of mining costs includes nothing for head office or corporate overhead, so the reality is those figures are badly understated. Indeed, a recent analysis of IAMGOLD's true mining cost concluded that it had risen from $1,232 per ounce in the fourth quarter of 2011 to $1,530 in the last quarter of 2012.
At that level, needless to say, it's barely worth bothering to operate and there's certainly nothing there for shareholders. What's clear is that high-cost miners and those with operations in risky countries are inferior investments to the metals themselves.
The Best Gold Mining Stocks
But that doesn't necessarily mean you need to scratch gold miners altogether.
The decline in gold miner share prices has been so great that those with low costs and political stability look cheap--- even compared to the metals.
So whether you buy gold and silver miners at this stage clearly depends on what you think gold and silver prices will do. (Here's a bet they are eventually headed higher.)
On balance, though I think the recommendation depends on where your portfolio is right now.
If you're holding lots of miners, all of them beaten down by losses, then you probably shouldn't buy any more - the investment maxim of not reinforcing failure is a good one.
If you want to prune a few miners from your current portfolio take another look at their mining costs and political risks and prune the high-cost miners and high-risk environments first. But don't sell out altogether; you may well be selling close to the bottom.
But on the other hand, if you have no miners or very few, you should probably load up now. At these prices, there's practically a fire sale going on.
In fact, here are two of my favorite gold miners right now:
■Primero Mining (NYSE:PPP): Primero is a gold and silver miner with two producing mines and a third project in Mexico. The company recently benefited from a favorable ruling in Mexico's tax court, which caused its stock price to jump and indicates that Mexico is a decent place to do business. Cash costs were $636 per gold equivalent ounce in 2012, down from $640 in 2011, and are expected to decline slightly in 2013. Earnings were 54 cents/share in 2012, and the company expects to expand production in 2013. Better yet, Primero trades at around book value and on a trailing P/E of 12 times.
■Freeport McMoran Copper and Gold (NYSE:FCX) Freeport is a larger, more diversified operation that mines copper and gold worldwide with big operations in the U.S. and Indonesia. It trades on 10 times historic earnings, 6.6 times projected earnings and at 1.7 times book value. Better yet, this one pays a hefty dividend yield of 3.8%.
So while gold miners as a group are certainly well-off their highs, at these levels a few select stocks have landed in the bargain bin.
Now I don't know about you, but that's one of my favorite places to shop.
Aside from gold, a massive global shortage is creating a huge opportunity in palladium right now. You might not realize this but palladium is 15 times rarer than platinum and 30 times rarer than gold.
That's creating an opportunity of its own for a small palladium miner that's currently trading under $2.00 a share. This same company is sitting on potentially $600-$700 billion of this precious metal at today's prices. To learn more about this company click here.
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