4 Keys to Picking the Best Gold Mining Stocks
Investors tend to see gold as a safe haven from economic, political or currency risk. The yellow metal is also considered a hedge against inflation, so the price of gold—along with investor interest in gold bullion and gold mining stocks—tends to rise and fall along with indicators like the consumer price index (CPI).
Gold has moved lower in the past year, and U.S. inflation is well within the Federal Reserve’s target range. However, inflation could tick higher in the longer term due to, among other things, the large amounts of money central banks around the world have been injecting into their economies.
Risks and Rewards of Gold Mining Stocks
There are a number of ways to invest in gold. For example, you could buy physical gold, units of a gold exchange traded fund or gold mining stocks.
Each method has pros and cons. Gold mining stocks, for example, are subject to the various costs and risks that other miners face, such as budget overruns, an acquisition that goes sour or local resistance to a project.
Barrick Gold (NYSE: ABX), for example, has been forced to suspend work on its Pascua Lama project, high in the Andes mountains, due to cost pressures, environmental opposition and lower gold prices.
Earmarks of Successful Gold Mining Stocks
Here are our four indicators we look for when picking mining stocks of all types—including gold producers:
- Sufficient scale: Miners must have consistent access to low-cost capital. That’s tough for smaller producers, and it’s a major catalyst behind the wave of resource-sector mergers in recent years.
- Controlled leverage: Debt is key to mine development, and a certain level is appropriate for financing a successful project, because it’s secured by a valuable asset. But having to refinance a lot of maturing debt at once can dramatically ramp up a company’s interest costs, ending the chances of successful mine development, even when gold prices are high.
- Long-term production potential: Mining firms must develop new reserves and production to grow. We look for companies with enough projects to lift their output over time, the means to put their plans into action and the expertise to follow through.
- Minimal resource nationalism risk: When the price of a resource rises enough, even generally pro-business host countries will be tempted to increase their share of the profits.
There’s a huge difference, however, between raising a tax, imposing a fee or increasing pollution standards, as we’ve seen in countries like Canada and Australia, and the outright nationalization of gold mines that’s occurred in Venezuela.
The only way for a company to protect itself is through geographic diversification. Producers that focus on politically stable places like North America deserve a premium and generally earn it over time.
This Gold Mining Stock’s Political Risk Is Low
Goldcorp (NYSE:GG), a senior gold miner we cover in our Inflation Survival Letter advisory, matches up well with these criteria.
Goldcorp’s operating assets include five mines in Canada and the U.S., three in Mexico and two in Central and South America.
The company also boasts solid pipeline of development projects, including the Cerro Negro project in Argentina; the Éléonore gold project in Quebec, Canada; the Cochenour project in Ontario, Canada; a 70% interest in the El Morro project in Chile; and a 40% stake in the Pueblo Viejo project in the Dominican Republic. These properties, along with its operating mines, position Goldcorp for significant production growth in the coming years.
Low Production Costs Are a Plus
The company currently pays a dividend yield above 2.5%, and its payout has increased 233% since 2009. Even so, the company is also focused on reinvesting its profits for further growth.
Goldcorp, like almost every other primary gold miner, experienced considerable pain during the recent decline in gold prices, but its lower costs buffered it from having to shut down many of its operations. It boasts one of the lowest production costs of any primary gold producer in the world, at between $1,050 and $1,100 per ounce.