Statistically Speaking, This Is the Best Gold Miner

Following one of the ugliest years in more than a decade for the lustrous yellow metal, spot gold prices are once again beginning to make a comeback.

I would propose there are a number of reasons behind the recent rally in gold, which pushed price as high as $1,392.60 in March from a low of $1,181.40 in late December.

To begin with, gold is often viewed as a hedge against market volatility and uncertainty. With the Nasdaq Composite getting absolutely creamed of late and momentum stocks being hit, gold has suddenly curried some favor among buyers.

Second, ongoing political tensions between Russia and Ukraine (as well as the rest of the world) creates doubt that the ongoing global economic recovery can continue. Russia's ability to import and export goods is vital to the ongoing improvement in the global economy. Any disruption to that end could lower GDP growth rates in a number of countries, making gold an intriguing safe-haven investment.

Lastly, forecasts are calling for gold demand to rise over the coming years. According to the World Gold Council, China's demand for gold could rise 20% to 1,350 tons by 2017 as its rapidly emerging middle class begins to demand luxury goods like jewelry and investments such as gold coins. We often forget that precious metals like gold can be driven by simple supply and demand -- and the demand side of the equation looks healthy over the long term.


Source: Giorgio Monteforti, Flickr

The metrics behind the market's largest gold miners
With that being said, there could be some very attractive valuations within the gold-mining sector. Of course, we need to understand that not all gold miners are created equally. That's why I'm again going to lean on a number of statistical criteria I established in January 2013 to determine what gold miner really is the best, statistically speaking.

As a refresher, I plan to focus on four criteria to help evaluate and differentiate the 10 largest gold miners from one another. These are:

  • Cash cost per ounce
  • Gold production increase or decrease
  • Debt-to-equity ratio
  • Forward P/E

Cash costs are obviously important because uncontrollable expenses won't lead to profitability, especially with gold prices well off their highs. Therefore, a miners' ability to control costs and/or abate them with by-product sales is paramount to success.

Source: G =], Flickr

Secondly, I want to see gold production growth. It wouldn't be too uncommon to see tepid growth in this environment with capital expenditures and spot prices lower than a year ago, but those miners that are poised to expand production are the ones most likely to succeed.

Third, we're going to focus on debt. Most miners are going to have to go into debt in order to fund exploration, the future expansion of existing mines, purchase mining equipment, and perhaps even hire new employees. What I want to see is as low a rate of debt relative to equity as possible, because miners with lower debt-to-equity ratios are going to have more flexibility to make deals and possibly expand their operations.

Lastly, we're going to take a look at forward P/E since it's not about where a stock has been, but where it's headed next. Investors are intent on seeking out deep value stocks and we're going to determine if any lie within the gold mining sector.

The results
Now, let's have a look at the results. A few things to consider as you examine the results below, they are from each company's latest quarterly filing, they don't include royalty interest companies, such as Royal Gold, and they may be based on gold equivalent ounces produced.

Company

Cash Cost/Oz.

Production

Debt/ Equity

Forward P/E

Barrick Gold 

$573

(15.2%)

81.8%

15.1

Goldcorp 

$621

9.8%

12.7%

22

Newmont Mining 

$755

15.7%

51.6%

17

AngloGold Ashanti 

$748

18%

125.9%

13.4

Yamana Gold 

$417

(6%)

16.8%

17.8

Agnico-Eagle Mines 

$623

36.3%

34.4%

40.1

Kinross Gold 

$765

(10.8%)

34.8%

18.7

Eldorado Gold 

$577

(14.2%)

11%

22.3

Gold Fields 

$776

21%

50.9%

12.2

New Gold 

$316

(4.8%)

31.7%

27.1

Sources: Individual quarterly reports, Yahoo! Finance, data as of market close 04/15/2014

As you can see, this isn't as cut and dried as when we did this a little over a year ago with falling gold prices and big writedowns complicating things for a number of miners.

As it relates to cash costs, New Gold (NYSEMKT: NGD  ) reigns supreme with a $316 total cash cost per ounce. New Gold, the smallest gold miner of the 10 by market value, relied on higher co-product production, such as silver and copper, to help offset gold mining costs, and also worked diligently on lower its operating expenses. Previous champ, Yamana Gold (NYSE: AUY  ) , gets an honorable mention here as well for its $417 cash costs per ounce figure, which was also offset by the production of silver.

In terms of production, only five of the 10 largest gold miners delivered an increase in their latest quarter over the prior year. None delivered a stronger gain than Agnico-Eagle Mines (NYSE: AEM  ) , where gold production soared 36%. The attributable factor here was the beginning of commercial production at its Goldex and La India mines, as well as a big surge in production (46,195 oz. more in Q4 2013 than Q4 2012) in its Meadowbank mine.

In terms of debt to equity, we want a figure that's as low as possible -- and that title belongs to Eldorado Gold (NYSE: EGO  ) . As I said earlier, utilizing debt to fund mine build-outs and expansion is nothing new in the mining sector, but Eldorado is a true rarity in that it was net cash positive $628.3 million in cash and cash equivalents and $601.4 million in debt -- as of the latest quarter. This solid financial footing gives it more flexibility than some of its peers which will be beneficial if gold prices continue to head higher.

Finally, on a forward-earnings basis there is no company cheaper than Gold Fields (NYSE: GFI  ) , which operates mines in South Africa, Peru, Ghana, and Australia. At just 12 times forward earnings it trades well below the high teens average of the group above, but that very well could have to do with investors factoring in the company's high cash costs per ounce for gold production.

The best gold miner, statistically speaking
Now that we've seen who's leading each category, let's break each down from best to worst and decipher which gold miner is the best of all, statistically speaking.

Company

Cash Cost/Oz.

Production

Debt/ Equity

Forward P/E

Cumulative Score

Barrick Gold

3

10

9

3

25

Goldcorp

5

5

2

7

19

Newmont Mining

8

4

8

4

24

AngloGold Ashanti

7

3

10

2

22

Yamana Gold

2

7

3

5

17

Agnico-Eagle Mines

6

1

5

10

22

Kinross Gold

9

8

6

6

29

Eldorado Gold

4

9

1

8

22

Gold Fields

10

2

7

1

20

New Gold

1

6

4

9

20

Sources: Individual quarterly reports, Yahoo! Finance, author's calculations

I hate to be the bearer of unsurprising news folks, but the previous king of the gold miners, Yamana Gold, is once again your tippy-top choice in the sector, speaking strictly from statistics.

Despite seeing its production rank in the lower half of the group with a 6% drop in the latest quarter, it has among the lowest debt-to-equity ratios, the second-lowest cash costs per ounce thanks to its byproduct production, and it's priced attractively at less than 18 times forward earnings.

Coming in a very close second was Goldcorp, which is a model of consistency with a manageable debt level, reasonably low cash production costs, and nearly 10% year-over-year increase in production in the fourth quarter.

On the flipside, gold miners that have dealt with massive writedowns are clearly the ones to avoid, such as Kinross Gold, Barrick Gold, and Newmont Mining, which had the worst cumulative scores of the group. The high costs of building out prospective mines is tying the hands of these larger miners that invested heavily in permits and acreage over the past decade and are now required to wait for better times before they boost capital expenditures.

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Read/Post Comments (6) | Recommend This Article (8)

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 April 18, 2014, at 4:38 PM, Ventureshadow wrote:

    In considering ranking I'd consider free cash flow (i.e., profit less capital expenditure) and return on equity too. A company that puts all its profits into capital expenditures leaves nothing for stockholders.

  • Report this Comment On April 18, 2014, at 5:52 PM, SSBN620 wrote:

    I'd just like to take this opportunity to thank JPM and the other high frequency traders on the COMEX who continue to short the PM markets, even as the news is breaking that the Fed has been lying to the world for 30 years, selling off virtually every ounce of the 8133 tons of gold that used to be held at Fort Knox, KY. Our own monthly FT900 reports, dating back to 1991, prove that there are at least 5577 tons of gold that has permanently left the US, beyond all available domestic reserves (unless you include the Fort Knox reserves, which haven't been audited since 1953). The opportunities to buy have been absolutely priceless. Thanks again, Fedbanker traitors.

  • Report this Comment On April 18, 2014, at 6:20 PM, bah9681 wrote:

    I don't believe this article, written on 18 April, has taken into account any of the recent news for Yamana Gold (the supposed champ), particularly with it's pursuit with the acquisition of Osioko Mine, in coming up with its assessment. Please correct me I am wrong, but if this is not included in the assessment, then this article should be corrected and updated just as the stock price has been updated and corrected.

  • Report this Comment On April 18, 2014, at 9:07 PM, TigerPack1 wrote:

    Tiger's Two Cents-

    I am very bullish on gold right now....

    http://seekingalpha.com/instablog/17314402-paul-franke/28300...

    I would rate GG the best blue-chip gold miner.

    NG the best long-term exploration play.

    PAAS the best pure silver miner play.

    GLD the best plain vanilla gold asset for hedging and diversification.

    UGL the best, lowest cost, direct leverage for gold owners bullish like myself, using a regular stock brokerage account.

    ANV is the craziest pick right now, with tremendous upside if gold and silver spike in 2014, basically from a massive short interest position and news in the last few weeks of class action lawsuits, because the gold price isn't rising and management should've known it?

    I own all the above and others for full disclosure.

    I like SWC in the PGM space, but have been selilng it in last week.

    $2000+US gold and $50+US in 2015 is not a pipe dream? $5000 gold and $200 silver by 2020?

    Please eat popcorn while reading my Seeking Alpha story on why gold is cheaper than you might think in early 2014. Plenty of unique analysis and data points.

  • Report this Comment On April 28, 2014, at 5:05 AM, AnsgarJohn wrote:

    TigerPack1 GLD has 0 zero cash flow.

  • Report this Comment On April 28, 2014, at 5:06 AM, AnsgarJohn wrote:

    @TigerPack1 GLD has 0 cash flow, it is not a money making machine.

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