Metal Miners in the Doghouse

You don't have to be the world's fastest swimmer or a star of the balance beam to emerge from the Olympics with a heap of metals.

Investors in gold and silver mining companies continue to wait patiently to experience the thrill of victory. Since the onset of a correction in mid-March, the price of gold has declined 20%, while the miners -- as measured by the Market Vectors Gold Miners ETF (AMEX:GDX) -- have retreated a disappointing 33% from their precorrection highs.

Members of Motley Fool CAPS have taken notice, and have demoted some former darlings to mere three-star status. Since I fully expect gold and silver to reclaim their precorrection highs and continue higher, I used the invaluable stock screener tool at CAPS to ascertain which previously adored miners have fallen the furthest from grace. This screen highlights the tool's ability to examine the impacts of a market-moving event and identify compelling targets for further research. The search criteria I used were:

• Sector: Basic Materials; Industry: Metals & Mining.
• A precorrection CAPS rating of four or five stars on March 14, 2008.
• A current CAPS rating of three  stars or fewer.
• A price-to-book ratio below 4.0 to eliminate some of the pricier ones.
• Share price decline of at least 10% over the last 26 weeks.
• At least 100 CAPS All-Stars continue to rate the shares an outperform.

Here are five companies returned by the screen:

Source: Motley Fool CAPS. Price change from 2/22/08 through 8/22/08.

Exacerbating the pressure from falling metal prices, mining stocks as a whole certainly didn't make the podium with their recent earnings performance. Goldcorp and Hecla Mining both lost money, while Gold Fields and Agnico-Eagle delivered disappointments of their own. Newmont Mining and Yamana Gold (NYSE:AUY) were notable exceptions, each posting golden earnings.

A major miner for junior prices
Between rising production costs, electricity shortfalls, and a tragic spate of accidents at its South African mines, the road to gold has been fraught with pitfalls for Gold Fields. Now the company is halting production from the main shaft of the Kloof mine and reducing output from two others while shaft support systems are installed and improved. Under all of these pressures, Gold Fields shares have sunk to levels not seen since early 2002, when gold traded for less than $300 per ounce!

I believe that the punishment in this case does not fit the crime. Let's face it, owning up to widespread safety deficiencies is the right thing to do, and the impact upon production will be relatively short-lived. Meanwhile, exciting new mines and mine expansions will be coming online this year in Ghana and Australia.

For a measure of how under-valued these shares may be, consider the world of disconnect between the company's enterprise value of $6.5 billion and the $75 billion market value of its proven and probable gold reserves. CAPS All-Star marcd77 knows a bargain when he sees one: "[Gold Fields] has some problems considering it's holdings in South Africa and the issues with electricity in that country but the company has monster reserves and appears undervalued vs. the price of gold and it's peer industry competitors."

I agree, and view the current price of Gold Fields shares as a seriously compelling long-term entry point.

Even Goldcorp looks cheap
I've been both hot and cold on Goldcorp. I began whistling a more positive tune back in May, and recently issued a Foolish pardon for the loss in the second quarter. Goldcorp shares have suffered the worst decline among the companies listed above, and now trade at just 1.8 times book value. Just last week, CAPS All-Star jstegma pointed to the broader bull market for gold as his rationale for rating Goldcorp an outperform:

Gold will be back at $1000 soon. We have heard the "all clear" signal several times for the credit crisis, but each time it has turned out to be a false alarm. It's not over yet, and next time the panicky feeling comes around people will head for gold like never before.

Unfortunately for the U.S. dollar, I think he's right. As painful as this correction has been for investors in precious metal miners, I believe that as gold and silver regain their luster, these miners will again step to the podium and hear the applause of appreciative Fools.

Further Foolishness:

• Mining costs will push spot prices higher.
• Consolidation looms on the horizon.
• The Eagle has landed.