The Heavy Favorites for Growth in Gold

Growth in gold is reflected everywhere around you. Gold remains the most reliable barometer of structural impairment in the global financial system, and its mirror image is reflected in the eroding purchasing power of our U.S. dollars over time. Gold is growing both in price and in stature, as it reasserts its historical role as humankind's most enduring and indestructible currency.

As veteran precious-metal investors and amazed onlookers alike will attest, gold's growth is illustrated artfully in the market-beating performance of quality gold mining stocks like Eldorado Gold (NYSE: EGO  ) -- as well as in physical bullion proxies like the eyebrow-raising SPDR Gold Trust (NYSE: GLD  ) -- over the course of the past several years.

When it comes to selecting the gold stocks with the greatest growth potential going forward, Fools will of course hone their focus upon expanding production volumes as one of the more reliable indicators of future outperformance. Along with the meteoric margin expansion and (cash-flow explosion) that those miners with favorable cost structures have begun to showcase in remarkable fashion, growth in production volume is a core driver of the leverage to gold price increases over time that makes mining stocks such an attractive investment option.

The terminal-growth paradox
It may seem an enticing notion to expect the industry's largest-scale operators to parlay their unrivaled cash flow, unfettered access to credit, and expansive property portfolios into some gargantuan production growth, but the truth is that gold's megaminers like Barrick Gold (NYSE: ABX  ) and Newmont Mining (NYSE: NEM  ) face a daunting array of obstacles to production growth. Speaking of cash flow, Barrick yielded $781 million in operating cash flow during the fourth quarter of 2010, and recorded a remarkable net cash margin of $1,042 for each of 1.7 million ounces of gold produced during the period.

When you unearth nearly 7.8 million ounces of gold per year as Barrick did during 2010, however, merely replacing annual production represents a monumental feat. Even some the largest gold mines in the world, like Barrick's looming Pueblo Viejo joint venture with Goldcorp (NYSE: GG  ) , only opens up reserves attributable to Barrick that equate to less than two years of the company's total output. As gold investors well know, projects of Pueblo Viejo's scale and caliber are scarce, and require many years to develop from initial discovery to production.

Undoubtedly, the shortest path to production growth for these golden uber-behemoths is through sustained and crafty redeployment of cash flow into strategic acquisitions. With the industry's consolidation trend accelerating as the gold price strengthens, the clear outlook calls for increasing competition for attractive targets resulting in rising premiums paid for that growth. While I am impressed that Barrick is able to target a 16% five-year growth plan despite these challenges, I continue to advise Fools to focus their gold exposure further down the production-scale ladder. While the industry's greatest share-price gains are likely to come from junior exploration and production companies, the purpose of this article is to focus upon the most exciting growth prospects among mid-tier and major miners.

Pinpointing gold's superior growth vehicles
Since growth stocks are often priced for success, Fools must take care to assess relative valuations among comparable miners when assessing their preferred vehicles in the space. Assessing value among miners is an intricate and nuanced discipline, requiring comprehensive consideration of reserve assets in the ground in addition to projected income and cash flow. Cost structures, permitting hurdles, potential construction or ramp-up delays, mining jurisdictions, currency conversions, balance sheets, and expectations for forward metal prices must all come together to inform the process.

When used properly, alongside the full suite of factors like those listed above, the ratio of a miner's enterprise value to the market value of its proven and probable reserves (expressed as EV/MVPPR) can provide a helpful (albeit crude) tool for beginning to understand relative valuations. When considered in tandem with production growth outlooks, the measure becomes somewhat more useful, and the table below displays reserve asset valuations and production growth targets for some of the hottest growth prospects in gold. Newmont Mining and Barrick Gold were added to determine whether lower or negative growth profiles were appropriately reflected in those valuations.

Beware the pitfalls of such a crude valuation metric. Gold Fields may appear the greatest bargain of the bunch with an EV/MVPPR ratio of just 0.12, but the miner also endures one of the highest production cost profiles of any major producer, with 2011 cash costs estimated at $760 per ounce. On an all-in basis, the company's notional cash expenditure for each ounce mined comes to $1,050, though I continue to applaud the company's publication of a comprehensive all-in cost metric that few operators divulge.

I have vocally hailed Goldcorp and Agnico-Eagle Mines (NYSE: AEM  ) as two of the very best growth stocks for gold, and with their gold reserves priced at 40% and 41% of their market value, respectively, I consider both stocks reasonably attractive valuations when their consistently low production costs and proven management teams are taken into consideration. With an anticipated 138% five-year growth spurt in the works, 2010's fastest-growing company according to Fortune Magazine -- Eldorado Gold -- may just be positioned to give them a run for their (gold) money.

Yamana Gold (NYSE: AUY  ) , meanwhile, remains the uniquely undervalued gem of the golden growth world, and an updated reserve asset valuation at just 26% of fair market value supports this claim. Although I do maintain far greater confidence that the management of Goldcorp and Agnico-Eagle will execute cleanly on their targeted growth spurts, I maintain that Yamana's industry-leading cost profile and proven organic reserve growth potential warrant a reserve-asset valuation far closer to those of their low-cost peers with similar growth outlooks. Goldcorp earns my nod for the highest-quality, lowest-risk play of the bunch, while Yamana remains the crystal-clear, deep bargain of the group.

Company

Enterprise Value

P&P Reserves
(m. oz.)

EV / Market Value of P&P Reserves at $1,400 Gold

2010 Gold Output
(m. oz.)

Targeted Production Growth Through 2014 or 2015

Agnico-Eagle Mines

$12.15B

21.3

0.41

0.99

50% to 1.5 m. oz.

Barrick Gold

$53.72B

139.8

0.27

7.77

16% to 9.0 m. oz.

Eldorado Gold

$8.84B

15.1

0.42

0.63

138% to 1.5m oz.

Goldcorp

$33.25B

60.1

0.40

2.52

60% to 4.0 m. oz.

Gold Fields

$13.00B

76.7

0.12

3.50

43% to 5.0 m. oz. *

Newmont Mining

$27.58B

93.5

0.21

5.40

flat to declining *

Yamana Gold

$9.30B

25.1

0.26

1.05

65% to 1.7 m. oz.

*Note: Gold Fields aims to have 5 million ounces of annual capacity either in production or in development by 2015, rendering this a decidedly more open-ended target than the others listed. The outlook for Newmont's flat to declining 5-year production profile represents the author's own estimate, accounting even for the recent Fronteer Gold acquisition.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Agnico-Eagle Mines, Eldorado Gold, Goldcorp, and Yamana Gold. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a gilded disclosure policy.


Read/Post Comments (6) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 28, 2011, at 5:38 PM, rpontius wrote:

    Is the P & P gold only?

  • Report this Comment On February 28, 2011, at 6:18 PM, XMFSinchiruna wrote:

    rpontius,

    Great question. The P&P reserve figures above are gold only, except for GFI and AUY, which lump silver together with their gold to measure GEOs (gold equivalent ounces). That's an important point though, since GG is massive silver reserves of 1.29 Billion (yes, with a 'B'!) ounces that are not captured in the reserve valuation data above. These distinct portfolio compositions and accounting practices are sometimes best adjusted for by using relative by-product cost structures as a complement to the above metrics.

  • Report this Comment On February 28, 2011, at 9:31 PM, golddlog wrote:

    Chris, did you take note of the recent high grade drill results for the Yellowknife project for Tyhee Development, now Tyhee Gold. Also, the name change seems to indicate they want to convey they are moving toward the goal of mining gold at that property. What do you think of Tyhee as a 3-5 year investment given where we are in this gold bull market? It seems they have been trying to develope the Yellowknife mine for near 10 years and are getting close but is the window of opportunity closing for some of these projects? The permitting process is underway and Yellowknife has a long history of mining, is it fair to surmise a favorable ruling? The TGB enviornmental approval debacle has given me pause in pursuing a similar investment scenario, however, Tyhee looks like they own an incredible resource. By the way I picked up some GPL for my daughters college fund and if it keeps up I may have enough for 4 years tuition. Private school, maybe not. Finally, I appreciate your fact based analysis and your tempered hyperbole when evaluating some of your most successful discoveries, it adds more to your credibility. I must say it was your creative writing skills that first caught my attention, but it is your track record that speaks louder than words. Thanks for your valuable insight, kind regards, Pat

  • Report this Comment On February 28, 2011, at 10:25 PM, MARKMAC2 wrote:

    Chris, do you have a rough price target on AEM?

    Would you say $86- $88+ is reasonable?

    Thanks, Mark

  • Report this Comment On March 01, 2011, at 7:50 AM, XMFSinchiruna wrote:

    Markmac2,

    Target prices must ultimately depend upon your own forecast prices and timeline for gold, as well as estimations of fair value at today's prevailing price. While the price range you cite could arguably represent fair value at today's metal prices, my own personal target prices (based upon multiple gold price scenarios) for AEM stands much, much higher.

  • Report this Comment On March 01, 2011, at 8:15 AM, XMFSinchiruna wrote:

    golddlog (Pat),

    I happen to consider Tyhee a terrific choice. I've been holding shares patiently for several years now, and it now represents one of my larger micro-cap holdings. It may sound counterintuitive, but I will feel more comfortable recommending the shares once the stock's momentum kicks in just a bit, thereby strengthening the company's outlook for access to capital going forward.

    Totally different assets, but as a stock it reminds me of Copper Fox when it was around the same price.

    As I stated in my case for Copper Fox back before its meteoric rise, I believe that the Prosperity permit denial was a one-off event, and not indicative of an anti-mining posture in Ottawa.

    Thank you for the kind words. I wish you continued success!

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