It has been a brutal last few years for the gold sector...
Gold prices are down 38% since they peaked in 2011... And gold producers are down with them. The Market Vectors Gold Miners Fund (GDX) – which holds the shares of most major gold producers – peaked two weeks after the gold price in 2011. Since then, it's down 72%.
But if you buy the wrong ones, you could lose a lot of money... After all, we don't know exactly when gold prices will turn around. So there may be more pain ahead for many gold miners.
Today, I'll show you a simple way to find the safest gold producers in the industry right now... And I'll share the top four that meet my criteria.
Let's get started...
The fall in gold prices has left the industry in a bad place. Low gold prices are crushing the profit margins of gold miners and are causing many to be strapped for cash. Some are even losing money on every ounce of gold they produce. If gold prices don't turn around soon, these companies' earnings – and share prices – will continue to suffer.
So if you're looking to invest in safe gold miners today, where do you start?
First, limit your political risk. Start by looking at gold producers based in the U.S. and Canada. I would much rather own companies with assets in Nevada or Quebec than in an African town that is under siege by rebels. There is an established rule of law in North America and the government generally does what it says it's going to do.
The next step is to search for large miners... search for companies with an enterprise value (market cap plus debt minus cash) greater than $1 billion. Bigger companies aren't guaranteed to perform better, but they do own more assets than their smaller peers. This gives them some flexibility in the event they need to raise money.
Next, look for the companies that have the cheapest access to gold. The price of gold is lower than it has been in several years. We want to buy companies that can sell their gold for more than they pay to get it out of the ground.
To screen for this, I compared a company's enterprise value (EV) with its reserves. Reserves are ounces of gold in the ground that the company can produce at a profit. From a value perspective, we want companies with the lowest EV per reserve ounce.
After applying these criteria, I found four companies...
|
Company
|
EV/Reserve Ounce
|
Enterprise Value
|
Mine Locations
|
|
Kinross Gold
(KGC)
|
$109
|
$3.6B
|
U.S., Chile, Brazil, Russia, Ghana, and Mauritania
|
|
New Gold
(NGD)
|
$123
|
$2.1B
|
Mexico, U.S., Canada, Australia,
and Chile
|
|
Eldorado Gold
(EGO)
|
$131
|
$3.4B
|
China, Brazil, Turkey, Romania,
and Greece
|
|
Detour Gold
(DGC.TO)
|
$157
|
$2.4B
|
Canada
|
|
Source: Bloomberg; all amounts in U.S. dollars
|
Three of these four companies are sitting near 12-month lows today. Shares of
Kinross Gold Corp. (TSX: T.K, Stock Forum) , New Gold, and
Eldorado Gold Corp. (TSX: T.ELD, Stock Forum) fell 49%, 56%, and 52%, respectively, from their highs.
However,
Detour Gold Corp. (TSX: T.DGC, Stock Forum) is the one example of what a good gold miner can do in a bad market. On November 5, 2014, Detour Gold shares were just more than C$6 each. Today, they are trading for more than C$15. That's a 149% gain in just seven months... during a time when gold miners are hated and the gold price isn't moving.
That's what can happen to the rest of these gold miners, too. The other three companies are also all mining gold and generating revenue. When the market heads back into the gold-mining space, these companies will soar, just like Detour Gold did.
Keep in mind, this trend isn't heading higher just yet. There's no guarantee these companies' share prices won't fall from here in the near future. But these companies are profitable despite today's low prices... They're a good value right now... And they'll profit when prices eventually go up.
Shares of Detour Gold have already run up... But I recommend looking into any of the other three names today.