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For the first time since March 2010 the price of gold has fallen below US$1,100 per ounce.  The precious metal started the year on a hot streak, reaching US$1,300 per ounce in mid-January before tailing off.  Experts tell us the recent fall began with the news Chinese gold reserves dwindled and rumours the crashing Chinese stock market was forcing investors to sell gold to cover margin calls.

Add to that the belief the US Federal Reserve will begin raising interest rates in September of this year along with positive news from Greece and the ever stronger US Dollar, and you have the makings of a classic “perfect storm.” Higher interest rates and stable economic outlooks are not good for gold investments.  

Technical analyst Darryl Guppy sees the possibility of gold falling below US$1,000 per ounce, as do investment banking giants Goldman Sachs and Morgan Stanley. Morgan Stanley appears to be the most bearish, stating the price could actually fall to US$800.  

While that may come in time, the price actually rallied a bit as it dropped below US$1,090 before falling off again.  Here is a one week price movement chart for gold.

During the gold bull-run gold mining stocks defied conventional wisdom by not going along for the ride; lagging behind the dramatic increases in the price of gold.  Miners have been doing better of late but that old trend is popping up once again.  For the month the price of gold fell close to 8% while the price of Market Vectors Gold Miners ETF (NYSE:GDX) fell close to 26%.

This suggests investors that like trawling the bottom for bargains may want to take a look at some gold mining stocks.  Shares of the one of the world’s largest gold miner, Barrick Gold (NYSE:ABX) dropped close to 37% for the month while shares of the largest miner in the US, Newmont Mining (NYSE:NEM) are down close to 27%.  So far, current investors in the biggest gold mines in Australia have seen less pain.  The following price movement chart compares our two largest gold miners, Newcrest Mining (NCM) and Northern Star Resources (NST).

Note that shares of both companies have actually bounced back a bit.  Are these two miners worth a look at this point?  Are there others?

Some would say only a fool or a mad punter would trawl for investments in this sector given the uncertainty about what exactly is the bottom.  You can find market experts making the valid point that as prices drop so will production which lowers supply.  At some point the price drop becomes attractive enough to spur buying interest in physical gold leading to an uptick in price.

No one knows how low the price of gold will go but bottom trawlers can find out the other critical factor in gold mining profitability – how much does the company spend to get the gold out of the ground.

Although the true bottom is unknown, it is a virtual certainty gold miners whose costs of production remain significantly higher than the price of gold will get gobbled up for their assets and fade away.

To separate the potential winners from losers we searched ASX pure play or near pure play gold miners for those with double digit earnings growth forecasts over the next two years.  Certainly if the price of gold craters further those estimates will come down, but those miners with outsized earnings forecasts are more likely to weather the storm.  In addition, we looked for miners that turned in positive earnings per share in FY 2014 and have higher growth forecasts for 2015 and 2016.  Companies coming off a low base of negative earnings per share can end up with a misleadingly high two year forecast in percentage terms.

We searched the most recent Quarterly Updates to determine the current AISC (All in Sustaining Costs) for those companies.  AISC is a metric introduced by the World Gold Council to more accurately reflect the total cost of production.  Historically miners reported Cash Costs, which did not include administrative and capital expenditures.  The companies in our table report AISC in Australian dollars.  To make the results meaningful you need to know the price of gold per ounce in Australian dollars as of 23 July 2015 was AU$1,481, compared to US$1,089.70.

Finally, we looked at total cash on hand, total debt, and gearing with an eye towards the ability to grow earnings by acquiring the assets of beleaguered gold miners who cannot remain profitable.  We found four gold miners to consider.  Here is our table.

Company

(CODE)

Market Cap

AISC

2 Year Earnings Growth Forecast

Share Price

Intraday 24 July

(52 Wk % Change)

Total Cash

(MRQ)

Total Debt

(MRQ)

Gearing

Newcrest Mining

(NCM)

$9.07b

AS$941

32.8%

$11.07

(+11%)

$128m

$4.4b

52%

Northern Star Resources

(NST)

$1.3b

A$1,093

119.3%

$2.05

(+30%)

$76.3m

$48.1m

16.6%

Evolution Mining

(EVN)

$1.07b

A$1,048

57.4%

$1.00

(+50%)

$47.4m

$156.2m

18.9%

Saracen Resources

(SAR)

$293m

A$1,139

54.8%

$0.35

(+10%)

$33.9m

$14.1m

6%

All four of these miners have some “breathing room” between AISC and the current AUD price of gold at $1481 per ounce.  Newcrest Mining (NCM) has turned itself into the lowest cost gold miner in Australia, but also has the lowest two year earnings growth forecast of any of the stocks in the table.  On 23 July the company released surprisingly positive results for the June Quarter, which came as welcome relief to worried gold mining investors.  The company announced higher than expected production at 673,542 ounces, beating median analyst estimates of 604,000 ounces.  Cost cutting led to lower AISC and the lower AUD contributed to higher than expected profit margins.

Newcrest has mines in Australia, Papua New Guinea (PNG), Indonesia, and Cote d’Ivoire, West Africa.  Many use more efficient extraction and processing allowing the company to successfully mine difficult sites.  At the opening of trading on 24 July NCM dropped from the previous day’s close of $11.84 to $11.40.

Northern Star Resources (NST) went on an acquisition binge back in 2010 and now boasts six operating gold mines in Western Australia along with exploration and development projects in progress.  The company has an impressive track record of total shareholder returns with an average annual rate over five years of 110.7% and 39.9% over three years.  Northern Star has a current fully franked dividend yield of 2% which is forecasted to grow by 66.1% over the next two years.

Despite its acquisitions, Northern Star has a strong balance sheet with more cash on hand than debt as of the most recent quarter (MRQ) and low gearing.

While both Newcrest and Northern Star have analyst consensus ratings at Hold, the remaining two stocks both have consensus Outperform recommendations.

Evolution Mining (EVN) is the sole owner and operator of five mines, four in Queensland and one in Western Australia.  The company has additional exploration projects underway and expects to extend the life of its currently operating mines.  Evolution’s June Quarter results showed record production levels and low AISC.  The company has acquired two new mines in 2015 and completed a successful capital raise with the proceeds going towards the acquisition of the Cowal Mine from Barrick Gold.  Evolution also entered into a strategic alliance with Phoenix Gold Limited (PXG) to develop prospects adjacent to one of Evolution’s newly acquired mines from La Mancha Australia.  The company has a current unfranked dividend yield of 1.7% with a two year dividend growth estimate of 12.6%.

The Cowal Mine and the property from La Mancha could result in a production increase for Evolution, lifting total production approaching 900,000 ounces.  In addition, both of these new mines operate at costs lower than Evolution’s existing mines; which could lead to a further reduction in Evolution’s overall AISC.  Three analysts have Strong Buy ratings on Evolution with two more at Buy.

Saracen Resources (SAR) is another stock that has drawn analyst attention.  There are three analysts at Strong Buy with five at Buy.  The company has assets in the North Eastern Kalgoorlie Goldfields of Western Australia, including multiple exploration sites at Thunderbox and operational mines and exploration sites at Carosue Dam and Red October.  Analysts apparently are expecting Saracen’s prospects to contribute substantially in the near and longer term future as the company as a Forward P/E of 5.75 and a Five Year Expected P/EG ratio of 0.06.  Northern Star is the only other stock to approach those numbers, with a Forward P/E of 5.11 and a Five Year Expected P/EG ratio of 0.22.

By 22:45 New York time on 23 July the price of gold had fallen further to US$1,179.32.  That apparently woke up the Australian Bears as the gold mining stocks in our table were dropping from 6% to 8%.  Here are the share prices and percentage drops for each stock as of 12:28 AEST on 24 July:

•    Newcrest         $11.06, down 6.59%

•    Northern Star         $2.03, down 7.31%

•    Evolution         $0.99, down 7.87%

•    Saracen             $0.34, down 8.11%.

With the bottom possibly nowhere in sight, it would seem only the most ardent believers in investing when there is blood in the street would jump on board at this point.  There may be more blood to come.

The latest move would enable Chinese individuals to buy overseas stocks, bonds and real estate directly rather than pick from a handful of government-approved foreign mutual funds as they are now obliged to do, state media reported this week.

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