3 Beaten-Up Gold Stocks: Bargains or Value Traps?

Historically speaking, gold stocks and gold miners haven't exactly been great investments over long periods of time, especially when compared to the returns of the S&P 500. Tahoe Resources (NYSE: TAHO), Barrick Gold (GOLD -3.98%), and Goldcorp (GG) are perfect examples. Each stock is down at least 60% in the past five years.

Then again, these gold stocks have had more recent struggles: each is down at least 8% in the last year alone. Yet, while these precious-metal miners are beaten up at the moment, each has growth projects coming online right now or in the near future. Does that make any of these gold stocks potential bargains right now?

Image source: Getty Images.

By the numbers

These three gold stocks have put investors through varying levels of misery in the last year. Barrick Gold, the largest of the three, has fared the best with "only" an 8% drop in the past 12 months. Goldcorp has subjected investors to a 20% drop, while Tahoe Resources has tortured its shareholders by losing 58% of its value recently. Keep in mind that the S&P 500 has gained 17% in the same span.

TAHO data by YCharts

Unlike its two peers, Tahoe Resources has been thumped for good reason. The company's Escobal mine in Guatemala, responsible for most of its annual silver output, has been mired in political drama since early summer. An NGO successfully had the mine's operating license revoked on a technicality, although the Supreme Court reversed that decision -- with strings attached.

The Ministry of Energy and Mines was ordered to complete a review within 12 months with local populations regarding the impacts, if any, realized from the mine. While that could cause the operating license to be revoked again in the future, the ministry decided not to renew the export license of Tahoe Resources today. The move effectively knocks Escobal offline. The mess doesn't stop there, though. The Constitutional Court is expected to announce a decision on the company's appeals by the end of 2017. The result could be that operations return to normal, the mine is permanently shuttered (unlikely), or we end up with some messy in-between.

The uncertainty and unfamiliarity with the Guatemalan legal and political system have rightfully scared away Wall Street. Tahoe Resources remains a very risky stock. While it could rebound sharply depending on the outcome of the unfolding drama, it doesn't seem worth the risk for investors.

Image source: Getty Images.

In contrast, the punishment Mr. Market has dished out to Barrick Gold stock and Goldcorp stock seems disproportionate. The former has steadily grown its net margin in each of the last four quarters, all the way up to a remarkable 50% in the second quarter of 2017. Debt levels have dropped, cash flow has soared, and investors have a bevy of growth projects to look forward to.  

Investors are probably aware that Barrick Gold has had a busy year optimizing its portfolio. It began a strategic partnership with leading global miner Shandong Gold, which netted $960 million from an asset sale. The pair will explore jointly developing major mines for future growth.

In other moves, Barrick Gold sold a 25% interest in its Cerro Casale project in Chile to Goldcorp, acquired new land next to its existing Nevada operations, and is completing plans to bring the Alturas project in South America into the development phase. When these growth projects are combined with the fact that gold production is rising and costs are falling, it's easy to think better days are ahead for the stock.

Image source: Getty Images.

Goldcorp has also been reconfiguring its mine portfolio to rid itself of non-core assets and partner up to derisk the development of other deposits. The company has sold off $500 million in assets and is on track to cut operating expenses by $250 million per year. It seems well on its way to increasing gold production 20%, increasing gold reserves 20%, and reducing all-in sustaining costs 20% -- the "20/20/20" plan -- in the next five years. 

So, are any of these beaten-up gold stocks bargains? Wall Street seems a bit mixed on future earnings potential for each, while current valuation metrics are also a mixed bag.   

Data source: Yahoo! Finance.

Tahoe Resources appears to be a bargain on paper, but that's because its stock has cratered from the Escobal fiasco. I wouldn't be tempted to invest.

Meanwhile, analysts aren't very optimistic that Barrick Gold can maintain its current level of earnings, but that's mostly because trailing P/E includes major asset sales. While it boasts a higher price-to-book value than Goldcorp today, it's expected to be more attractively valued one year from now. It boasts a much more favorable EV-to-EBITDA ratio than Goldcorp today (a value under 10 is generally considered healthy).

What does it mean for investors?

Investors interested in gold stocks and looking for a bargain may find exactly what they're looking for with Barrick Gold and Goldcorp. Both companies have executed well recently to optimize their operations and portfolios, without taking their eye off future sources of growth. And although Tahoe Resources stock is trading a bargain prices relatively speaking, the underlying circumstances should make investors think twice about buying right now.