You’ve heard it before – Buy when there’s blood in the streets. For the trading year 2013 six of the ten worst performing stocks on the ASX were gold miners; three were mining services providers; and one was a uranium miner. In the closing days of 2013 the S&P/ASX All Ordinaries Gold Index was down 63.6 per cent and the price of gold saw it biggest decline in more than 30 years. Neither the gold bugs nor the gold bears got the trajectory of the price of gold right as the precious metal refuses to budge from a floor of around US$1200 per ounce.
Should bargain hunters look at gold miners and related service providers right now? Bullion reached a record $1,923.70 in September 2011 and the multitude of predictions of it breaching $2000 and beyond never came to pass. Neither did the dire warnings the price of gold would fall below US$1,000. From the Monex Precious Metals website, here is a 5 year chart for the price of gold:
The share price of gold miners has suffered as much if not more than the price of the precious metal itself, defying repeated cries from analysts and experts that the miners were too cheap to ignore. They got cheaper. Most analysts and experts agree the price of gold rose as a result of monetary easing policies globally and especially in the United States. As it became increasingly clear the US Federal Reserve would begin to “taper” its bond buying the price of gold began to fall. The P/E ratio of the world’s top gold miners is at a ten year low. Here is a chart:
Buying the miners right now may well be for punters only, but longer term investors with some tolerance for risk should be asking themselves if the worst is already “priced-in.” One thing to keep in mind is that in the face of lower prices for gold bullion, the world’s gold producers have cut back on production. Let’s take a look at the worst performers on the ASX in 2013, paying special attention to the miners. Here is our table:
2013 % Decrease
2013 Closing Share Price
Current Share Price
(Price to Tangible Book Value)
2 Year Earnings Growth Forecast
5 Year Estimated P/EG
5 Year Total Shareholder Return
Silver Lakes Resources
Resolute Mining (RSG)
Newcrest Mining (NCM)
Evolution Mining (EVN)
Medusa Mining (MML)
Silver Lake Resources (SLR) has gold and copper production and exploration assets in Australia. The latest major analyst recommendations on the company come from Macquarie (Underperform) and Deutsche Bank (Sell) on 21 January 2014. Both cite the company’s weak balance sheet, which in the analysts’ views more than offset a recent positive production report. Silver Lake has total debt of $8m for the quarter ended 31 December 2013. The share price got a boost from the production report and is now trading about 10% above its 2013 year end closing price. Here is a 3 month price chart for SLR:
Fellow junior miner Resolute Mining (RSG) carries the same risk as Silver Lake – a weak balance sheet. Resolute has $91.3 million total debt (MRQ) against $31.9 million total cash. On 23 January 2014 Citi downgraded RSG from Buy to Neutral and lowered its price target from $0.90 to $0.70, citing the company’s rise in leverage in the December quarter as it bought mining assets in Africa from Noble Minerals. The company has production and exploration assets in Africa and Australia. It recently reaffirmed 2014 production guidance of 345,000 ounces at an average cash cost of $890 per ounce. However, the more accurate measure of production costs now being used by many mining companies is the AISC, or All-In-Sustaining Cost, which Resolute management says will come in at $1,175 per ounce for FY2014. Cash costs only take into account the actual cost of mining while AISC includes overhead and capital expenses relating to sustaining production, such as head office expenses and exploration expenses. The risk of an AISC at $1,175 is obvious. The safest plays right now are the lowest cost producers that could remain profitable should the price of gold fall. Investors and market experts who do not take AISC into account would see Resolute as a low cost producer.
Resolute does provide some evidence there’s still appetite for gold mining shares. Merger and acquisition activity in troubled sectors is common but 2013 was a relatively slow year for M&A in gold. However, the year-end saw some deals and investors responded positively. Here is a three month share price chart for Resolute showing market reaction to the company’s African acquisition from Noble:
Newcrest Mining (NCM) is Australia’s premier gold miner with operations in copper and silver as well. Production and exploration assets range from Australia to West Africa to Asia and the Pacific Region. On 21 January the company issued its quarterly production report which was positive on two fronts. Production exceeded analysts’ expectations, and perhaps more importantly costs were down. Like others in the mining sector, Newcrest is benefiting from the falling AUD. The company reported AISC for the quarter of AUD$921 per ounce and USD$857 per ounce. The news prompted an upgrade from Underperform to Neutral at Macquarie, with a target price increase from $7.00 to $9.50; and from Sell to Neutral at UBS with a target price increase from $6.90 to $11.20. CIMB securities maintained its Add recommendation with a price target of $14.30. Newcrest shares are up more than 15% since 2013 year end. Here is the chart:
The Price to Book Ratio (P/B) can be a favored measure to indicate a bargain stock if it is viewed as an indication a stock is trading for less than its book value. We chose to include the harder to find Price to Tangible Book Value in our table to illustrate the point that the P/B alone can be misleading. First, in a depressed sector it is reasonable to assume most stocks will have a low P/B. As it stands, the current P/B for the Materials Sector is 0.75. Of greater importance is the issue of tangible versus intangible assets. A tangible asset is something that can be converted into cash. Intangible assets include such things as patents, brand reputation, and “goodwill.” You can’t take any of these to the bank but they can be valid measures for some technology companies and retailers like Woolworths. You can find intangible assets listed on a company’s balance sheet and they can change the scenario that the stock is trading “below its book value.” Mining Services provider Transfield Services illustrates the point, with a P/B of 0.61 which balloons to 2.63 when the substantial goodwill the company claims is factored in. In short, with the exception of Transfield and Medusa Mining, every stock in the table is trading below its net tangible book value.
The next stock is a service provider to the mining and resources sector, Forge Group Ltd (FGE). The company is broadly diversified, offering engineering and construction services to resources and mining companies, asset management services, power generation, and project management services. This one appears right now to be suitable for mad dogs and extreme punters as the company is now in its second trading halt in the last 6 months pending a financial update. The share price has dropped from close to $6 in early September of 2013 to less than a dollar. Here is the sad picture:
Prior to November of 2011 Evolution Mining Ltd (EVN) went by the name Catalpa Resources. A merger and an acquisition of some Newcrest Mining assets led to the creation of EVN. Evolution has five operating gold mines in Queensland and Western Australia, with the latest at Mt. Carlton having gone into production in June of 2013. The company is pursuing an aggressive growth strategy, with the potential of substantial increases in reserves being reported by the board of directors. This relative newcomer ranked second among Aussie gold producers for the June Quarter of 2013. Here is a chart from Australian-gold.com:
As of 29 October 2013 an analyst at Macquarie maintained a Neutral recommendation on the stock but raised the price target from $0.90 to $1.00, stating that Evolution “has the ticket” for investors who see an upturn in the price of gold. However, on the same date Deutsche Bank cautioned that Evolution’s all-in costs of $1,338 are a concern. The company’s most recent quarterly production report highlighted the lower costs of its Mt Carlton mine and stated it is aggressively pursuing cost reductions.
Ausdrill Ltd (ASL) is a mining services provider with operations in Australia, West Africa, and the UK. The company has 19 separate businesses offering a wide range of services to the mining and energy sectors. In early November 2013 the shares went into a trading halt pending an announcement from the company on revised guidance. The announcement that FY 2014 profit was expected to be in the range of $35 to 45 million (down from $90 million in FY 2013) met with a predictable reaction. The share price dropped almost 30%. Here is the chart:
The lowered profit estimates led to Standard & Poor placing Ausdrill’s Credit Rating “on watch with negative implications.” There are still 6 analysts with Buy or Strong Buy ratings on ASL. On 13 November Deutsche Bank stated on the “long view” it was maintaining its Buy rating while lowering the price target from $2.00 to $1.50.
Medusa Mining Ltd (MML) is an Australia based company with gold production and exploration assets in the Philippines. The company had a successful capital raise to fund expansion and as of the most recent quarter has $2.25 million in total debt with $4.7 million cash on hand. The current ratio is a healthy 2.50. There are 7 analysts covering the stock, with 1 Underperform, 1 Hold, 3 Buys, and 2 Strong Buys. Citi has a Buy rating on MML, stating on 24 September 2013 the stock is “a key pick, which the broker sees delivering volume growth and reduced costs.” The price target was raised from $3.20 to $3.70. The company stock price has improved over the last 3 months, outperforming Newcrest Mining. Here is a chart comparing the two companies:
Uranium miner Paladin Energy Ltd (PDN) has operations in Australia, Canada, and Africa. The company was crushed in the aftermath of the Fukishima nuclear disaster in Japan as nuclear power production halted. On 21 January, 2014 Citi summed up PDN’s plight, saying “there is no near term recovery in sight, leaving PDN with modest earnings, no growth, and a significant premium to valuation.” Citi dropped its price target from $0.40 to $0.25 and kept a Sell rating on the shares. One day later Bloomberg reported the Japanese government is planning to begin restarting nuclear reactors, fueling speculation of a new bull market in uranium. Paladin’s share price had already begun rising on the news it had sold assets to help improve its beleaguered balance sheet. Total debt (MRQ) stood at $673 million while total cash was $112.9 million. Here is a one month chart for PDN:
Transfield Services (TSE) has suffered due to its exposure to the mining industry, but the company is well diversified, offering construction, maintenance, and operations services to the energy, industrial, property, and defence sectors as well as to mining. In all, the company claims to serve 18 industries across 11 different countries. Despite the diversification, impairment charges stemming from the disastrous reductions in mining exploration led to a reported $254 million dollar loss for the company in FY 2013. The company’s balance sheet is a veritable train wreck, with $749 million in total debt (MRQ), $178.4 million total cash, a current ratio of 0.94, and gearing at 101%.
The final stock in the terrible ten of 2013 table is copper and gold miner Oz Minerals Ltd (OZL). The recent news that the Chinese Purchasing Manager Index fell below the benchmark 50 separating contraction from expansion sent global markets reeling. Oz has substantial exposure to copper and a slowdown in commodity purchases in China is not good news. However, the share price was in a strong upward trend as a result of a surprisingly positive December quarterly production report issued on 15 January. Production was higher, ore grade was higher, and costs were lower than expected, leading an analyst at CIMB securities to proclaim Oz had “proved the critics and the doubters wrong”. Oz currently has no debt, $432.9 million cash on hand, and a current ratio of 7.39. Here is a one month chart for OZL:
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