he price of gold, much like the price of oil, has been in the toilet lately. On September 25, 2015, gold was trading at $1,146.65 a troy ounce, down from $1,219.75 on September 19, 2014, a decrease of around 5.53% in just a one-year period, according to YCharts.
The daily annualized growth rate for a troy ounce of gold was even worse; it was -171.3%. That’s right, folks; gold has lost 171.3% of its value in recent years. The shiny metal is not even an investment anymore; it has become a toilet for gold bugs to flush their money down.
Naturally, this raises an interesting question: Are gold mining companies a good investment anymore? That’s a hard question to answer because gold miners do not make money by investing in gold; they make money by selling gold. That means lower prices could actually help the mining companies because they could sell more gold.
This is one of the reasons why gold prices are falling; the only way gold miners can cover costs and make a profit is to dig more gold. That, of course, lowers the price by creating a larger supply of gold on the market. The gold miners can quickly fall into the same trap that hit the oil industry; increased production equals lowers prices, but they are forced to keep increasing production to increase the bills.
A higher volume of sales can equal higher revenues, which can equal a better return for investors. Gold miners have some other advantages these days, including falling fuel prices. Most gold is extracted with power shovels and other heavy equipment that runs on diesel fuel. Since oil prices are cheaper, diesel fuel and the miners’ operating costs are lower.
Can Gold Mining Companies Make Money?
Okay, that’s the background situation, but can gold miners make money in such an environment? To answer that, we’ll take a look at the financial numbers for a few of the well-known players in the sector.
We’re using a technique called sampling in our analysis. In sampling, one takes out a few representative examples of a product and examines them closely. Here’s what my sampling of the gold miners’ financial numbers told me:
First I looked at Goldcorp (NYSE: GG), the British Columbia-based mining combine:
Does Goldcorp Make Money?
From the numbers, Goldcorp is definitely not making money right now. In fact, the numbers show us that Goldcorp is losing a lot of money. The depressing details include:
- A net income of -$2.135 billion on June 30, 2015.
- A diluted earnings per share (EPS) figure of -2.64.
- A return on equity of -11.80%.
- A payout ratio of -22.95%.
- An operating margin of -73.05%.
Okay, all was not so bad at Goldcorp; it also reported:
- A TTM revenue of $3.837 billion.
- A year to year to TTM revenue growth rate of 34.39%.
- Cash and short-term investments of $994 million.
- A free cash flow of $211 million.
- A gross profit margin of 16.16%.
- A dividend yield of 3.62%.
- $1.097 billion estimated sales for the second quarter of 2015.
- $4.392 billion in sales for the last fiscal year.
These numbers reveal something very interesting: Goldcorp’s business is actually increasing as its profits fall. It seems to be producing more gold than ever but making less money. The situation reminds me of the oil companies.
Naturally, some people will wonder if Goldcorp is undervalued. The answer seems to be yes. Goldcorp was trading at just $12.99 a share at the close of business on October 2, 2015, yet it had an enterprise value of $13.55 billion and total assets of $27.89 billion. To add icing to the cake, Goldcorp made $1.052 billion in cash from operations. Unfortunately, it also reported capital expenditures of $1.655 billion, which shows you the problem of these companies: Their high expenses eat up the profits.
So at the moment, Goldcorp is not making money, although it might if its revenue growth keeps up. Yet Goldcorp is definitely undervalued right now.
Does Newmont Mining Make Money?
Next I took a look at Goldcorp’s American rival: Newmont Mining (NYSE: NEM). Unlike Goldcorp, Newmont did seem to be making some money. It also reported impressive revenue growth.
The highlights of Newmont’s financial numbers from June 30, 2015, included:
- A net income of $483 million.
- A TTM revenue of $7.643 billion.
- A diluted EPS of .9701.
- A profit margin of 3.77%.
- A dividend yield of .59%.
- A payout ratio of 12.49%.
- A return on equity of 4.59%.
- An operating margin of 16.18%.
- Cash and short-term investments of $3.341 billion.
- Cash from operations of $1.946 billion.
- Capital expenditures of $1.227 billion.
- Estimated sales of $1.973 billion for the third quarter of 2015.
- Estimated sales of $7.817 billion for the current fiscal year.
So yes, folks, Newmont does make money, but is it a good investment? My take would be yes because it’s cheap and definitely undervalued and its revenues are growing.
Newmont was trading at $17.07 a share when the market closed on October 2, 2015. It was also definitely undervalued; YCharts tells us that Newmont had an enterprise value of $15.07 billion, a market cap of $9.031 billion and assets of $25.96 billion. It looks as if Newmont might actually be something of a value investment right now; it is a good company that is cheap.
How to View Gold Miners
The best way to look at gold mining companies is not as an investment in a precious metal. Instead, the best way to view these companies is as bulk commodities producers.
The good news is that the commodity they produce is still very expensive; $1,146.65 an ounce is still a lot of money. There’s still a lot of cash to be made in this business. If they can churn out a lot of gold, companies like Newmont and Goldcorp can generate a lot of income, especially if operating costs stay low because of low oil prices.
If gold prices jump because of economic instability and the panic buying it creates, so much the better. Remember, folks, the gold bugs are shelling out real cash money for the shiny metal; even if the gold fans lose money on their “investment,” the gold miners make a profit. That makes some gold mining companies a value investment because they generate cash, which is what value investors should always be interested in.
The truth is that gold itself is actually a pretty lousy investment, but gold miners can be a good investment. If you are looking for an undervalued sector with a lot of good, cheap stocks in it, gold mining is certainly worth a look.