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Monday's Top Upgrades (and Downgrades)

By Rich Smith – Mar 3, 2014 at 9:00AM

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Raymond James goes digging for gold mining stocks.

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense and which ones investors should act on. Today, we'll be focusing on gold mining stocks, as investment banker Raymond James introduces digs into the sector and finds one stock it likes -- but two more it doesn't.

With gold prices down 15% over the past year, and 28% off their all-time highs, a lot of investors are scared of the shiny metal. That said, gold prices have rebounded sharply in 2014, rising 12.5% since the start of the year -- so clearly, someone thinks there's still opportunity in the metal. Which miners are (and are not) best placed to profit from it?

Panning for gold
Let's start right off with the stock that Raymond James likes: Kinross Gold (KGC 2.11%). At first glance, the stock doesn't look all that attractive. Raymond James rates Kinross an "outperform" and puts a $6.50 price target on the stock, but Kinross is not currently profitable. Indeed, it lost money in each of the last three years -- $2.1 billion in 2011 (a banner year for gold prices), then $2.5 billion in 2012, and a whopping $3.7 billion in 2013.

Things aren't quite as bad as they seem, however. While Kinross's cash profits rarely match reported earnings even in the years when the company is profitable (2009 and 2010, for example), its current free cash flows of negative $488 million aren't quite as bad as the company's $3.7 billion GAAP loss make things appear. Debt is manageable -- about $1.3 billion net of cash -- and Kinross recently announced plans to float $500 million in new, unsecured debt that should help to keep it solvent until profitability returns.

Proved and probable recoverable gold reserves amount to 39.7 million troy ounces -- meaning the stock sells for about $153.40 per ounce of gold in its mines.

All that's gold does not glitter
Is that a fair price to pay for Kinross, given that once that gold comes out of the ground, it can be sold for $1,350 an ounce? To find out, let's compare Kinross to companies that Raymond James thinks are more attractive.

The first of these also-rans is Barrick Gold (GOLD 1.20%). Much bigger than Kinross, Barrick boasts 104,051 troy ounces of proved and probable recoverable gold reserves. On a $24.2 billion market cap, this works out to a valuation of about $232.58 per ounce of gold for Kinross' bigger brother -- about a 52% premium.

Like Kinross, Barrick is currently unprofitable, posting a massive loss of $10.4 billion in 2013, which is nearly half its own market cap. Free cash flow is likewise negative, albeit as at Kinross, not as bad as the GAAP number would suggest at "only" $1.3 billion negative FCF. And the biggest strike against Barrick, is, of course, the debt load it must try to service without free cash flow -- which amounts to $10.7 billion net of cash.

In short, however unattractive you may think Kinross Gold is, Barrick's numbers are even uglier. Raymond James only rates the stock a "market perform." I'm even less optimistic than that.

Goldcorp not entirely shiny, either
And finally, the third gold miner "winning" a rating from Raymond James today is Goldcorp (GG). Here again, the rating is "market perform" (with a $27 price target). Here again, the profits have gone missing ($2.7 billion reported lost in 2013). And here again, the free cash flow number is negative ($1.3 billion negative FCF).

Goldcorp does have one advantage over the other stocks named, however. From a GAAP perspective, at least, it's done a much better job of being able to produce profits in years past. Prior to 2013, Goldcorp reported profits for 12 straight years -- sometimes big profits, sometimes small, but always positive.

Proved and probable recoverable ore reserves amount to 54.4 million troy ounces, however, and that works out to arguably the priciest valuation on this stock, of any of the three discussed so far: $412.50 per ounce of gold. This relatively low level of reserves suggests that, of the three stocks discussed in Raymond James' reports, Goldcorp is the one at highest risk of feeling compelled to make acquisitions -- potentially resulting in stock dilution or higher debt levels and wrecking its record of profitability in the process. As such, the analyst is probably right to be cautious on it despite the presently attractive numbers -- because those numbers could change in a hurry.


Rich Smith has no position in any stocks mentioned, and neither does The Motley Fool.

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