Are The Hated Gold Miners Finally A Buy?

By Aaron Levitt | Updated September 02, 2014 AAA

If there’s one sector that absolutely hated by Wall Street and most investors, its gold stocks. After a torrid decade-long run, gold prices and funds that track them- like the iShares Gold Trust (NYSE:IAU) –have plunged over the last year or so. Many of the bullish catalysts for the metal- such as hyperinflation and a stagnating economy- haven’t yet come to fruition.

And while that’s been terrible for those investors who have owned the physical metal or futures contracts tracking its price, it’s been even worse for those firms that dig gold out of the ground.

Falling gold prices coupled with rising costs for production have zapped many miners’ profits and dividends. That’s resulted in some of the worst returns for the sector in years. However, as Wall Street has abandoned the gold miners, opportunities are beginning to present themselves. For investors looking for a contrarian bet, the large cap gold miners could be where it’s at.

Rising M&A

After spending much of 2013 licking their wounds, gold bugs may be looking at a better 2014. While calling a complete bottom in any sector is difficult to do, several interesting items are being to present themselves for the hated mining stocks. The biggest of which could be rising M&A activity.

A furry of buy-outs either marks the euphoric top of market or the value fishing bottom. With the Market Vectors Gold Miners ETF (NYSE:GDX) falling 54% in 2013, we’re far from the top. Today, gold reserves in the ground are going for valuations not seen in years and that’s prompted some of the bigger and better miners to break out their checkbooks. 

Last month, Primero Mining (NYSE:PPP) made a $220 million bid for junior miner Brigus Gold (NYSE:BRD). More recently, Canadian miner Goldcorp (NYSE: GG) recently shelled out $2.4 billion for Osisko Mining (OTCBB:OSKFF). That deal represents the largest buyout in the gold sector in more than two years. Not to be out done, China’s Gold Stone Mining made a $780 million bid for mid-tier producer Allied Nevada Gold (NYSE:ANV). Analysts at Cowen & Co (NASDAQ:COWN) estimate that this trend towards M&A will continue throughout 2014. 

The reason? Cowen estimates that the largest North American gold miners will need to develop some large-scale projects over the next few years in order to prevent depletion at their current mines. The investment banker predicts without these replacement mines many could be staring into the barrel of a gun by 2017 and it’ll be too late. Via its purchase, Goldcorp was able to secure roughly 30 million ounces of proven, probable and estimated reserves from the buyout. 

Valuations for the gold producers have gotten so low, that many miners will undoubtedly use this weakness to cull the herd and boost their reserves. All while pushing stock prices higher.

Time To Buy Some Gold Production

With rising M&A in the sector, now could finally be time to snag up shares of the beaten down miners. The previously mentioned GDX is most popular option. Yet, the iShares MSCI Global Gold Miners (NASDAQ:RING) maybe a better long term bet. Like GDX, RING tracks a basket of global gold producers- including Eldorado Gold (NYSE:EGO) and Barrick Gold (NYSE:ABX). However, RING does so at a much cheaper expense ratio of just 0.38%. Given that the fund includes both potential acquirers and mid-tier acquisition targets, it could be a great broad way to play any gold miner rebound..

On an individual basis, one of the best buys could be industry stalwart Newmont Mining (NYSE:NEM). With less financial difficulties as some of the other miners, Newmont could be the next big gold miner go on the hunt. Already, NEM has initiated cost-cutting programs and has taken hard write-downs of it reserves. Those helped it produce better than expected earnings results. Meanwhile, shares where the worst performer stock in the S&P 500. With that in mind, NEM could be ripe for a rebound as bullish M&A trends propel it forward and it gets reserves on the cheap.

Finally, from the buyers to the ones being bought. The junior miners have often served as the future source of supplies for the larger gold producers. However, given the low price environment for gold, many juniors may not survive long enough to be bought out. The Market Vectors Junior Gold Miners ETF (NASDAQ:GDXJ) is still the best way to participate in potential acquisition targets due to the broadness of its portfolio.

The Bottom Line

Over the last year, the gold miners have been one of the worst performing sectors. However, falling stock prices have led to a recent surge in M&A activity. For investors, that could finally signal the bottom in the group’s share prices. Adding a position in the miners might make sense.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

 

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