Standard& Poor’s is recommending gold and gold miners as top investmentpicks only days after downgrading U.S. Treasuries, which sparked afirestorm in financial markets worldwide that boosted the price of theprecious metal.
S&P’s Equity Research Services unit made therecommendation Wednesday. It is independent of the firm’s RatingsServices division, which lowered its long-term credit rating on thenation’s debt to AA-plus from triple-A with a long-term negative outlookFriday.
Gold futures tumbled today after CME Group, owner of theworld’s biggest futures market, increased margins on gold contracts by22 per cent. Gold had soared 8 per cent in the previous three days,bringing a one-year gain to 49 per cent, on U.S. and European debtconcerns and a slowdown in global economic growth. Safe-haveninvestments, such as gold, Treasuries and the Swiss Franc, havebenefited the most.
“We believe that gold is in a bull market,”writes S&P analyst Leo Larkin in a research note, because demandwill outstrip supply “for the foreseeable future.
“Gold’s pricestill has room to run despite its stellar advance and we believe thatthe precious metal could also continue to carry the prices of certaingold-related equities right along with it,” he added.
That’sbecause current global output remains stagnant while there is hugecentral-bank buying by emerging-market countries and a wide range ofinvestors due to the current market turmoil.
S&P expects goldprices and earnings for gold producers to continue rising through 2012,because the metal is seen as a safe-haven alternative to other assets inuncertain times.
“Weak economic data, possible sovereign-debtdefaults and general financial market instability” have all contributedto acceleration in buying by investors, it said.
It targets threegold-industry stocks that it says are poised to outperform the marketover the next 12 months: Barrick Gold , Newmont Mining and RandgoldResources.
In his argument in support of gold-producer stocks,Larkin said: They “have not been following the metal’s meteoric rise.The reasons for the disparity are three-fold: share dilution, risingexpenses and new ways to play gold.”
“But the wide disparitybetween the precious metal and the companies that produce it is about tonarrow for two reasons,” he said. First, because gold companies are nowgenerating enough free cash flow to fund internal expansion andexternal growth via acquisitions without having to resort to dilutivefinancing.” And, second, because “gold is now rising faster thanmining-input costs so there will be greater earnings per share leverageto the higher gold price.”
Here is a summary of those three companies’ prospects:
BarrickGold, S&P’s top pick, is the world’s largest gold company in termsof both production and reserves. S&P has it rated “strong buy,” withfive stars, its highest ranking. It said Barrick is attractively valuedat a recent multiple of about 10 times projected 2012 earnings pershare estimate.
S&P also likes its long-term strategy, whichis to increase its reserve base through the development or acquisitionof low-cost, long-life mines. “With new production from lower-cost minesand its output fully exposed to spot gold, Barrick is well-positionedfor a rising gold price,” according to Larkin.
Barrick has a market value of $48-billion (U.S.) and has a projected dividend yield of 0.98 per cent.
Itsshares are down 6.2 per cent this year, through Aug. 10, but havegained 7.4 per cent over the past month. The S&P 500 Index is down9.8 per cent this year and 16.5 per cent over the past month.
According to a FactSet review of 25 analysts’ ratings, there are 16 “buys,” five “outperforms” and four “holds.”
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NewmontMining, the world’s second-largest gold producer, has amine-acquisition strategy similar to Barrick’s. In April, itfortuitously announced a comprehensive plan for the development of itscurrent global portfolio of assets that would increase annual goldproduction to about 7 million ounces.
But Newmont missed analysts’second-quarter earnings estimates, which prompted S&P to lower its12-month target price on the stock to $67 from $75 and trim its 2011 and2012 estimates. Nevertheless, Larkin says he thinks the shares remainattractively valued since they sell at 12.5 times his 2012 earnings pershare estimate and carry a dividend yield of 2.1 per cent.
Newmonthas a market value of $28-billion. Its shares are up 2.5 per cent inthe past three months, but are down 1.6 per cent this year. Over thepast 10 years, it has an average annualized return of 11.5 per centversus the S&P’s 1.3 per cent gain.
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RandgoldResources, based in the U.K.’s Channel Islands but with its miningoperations in Africa, seeks to invest in assets or companies where thereis potentially hidden value in the resource base, and in countrieswhere the tax regime and political situation are favorable.
S&P’sLarkin favors it for its strong balance sheet and healthy cash flowfrom existing operations, which will enable it to increase itsexploration spending to find and develop new deposits, but cautions thatit’s the riskiest of the three stocks. He said its shares areattractively valued, recently trading at about 16 times S&P’s 2012earnings estimate of $6.22 per share.
Shares of Randgold, whichhave a market value of $9-billion, are up 24 per cent in the past monthand 26.4 per cent this year. Over the past five years, its shares havean average annual return of 36 per cent.