Certain gold stocks are still cheap
Silver Stock Report
by Jason Hommel, May 6, 2002
It is nice to see more media coverage of the gold industry these days. Much of it is actually beginning to turn surprisingly positive as they report the percentage that gold funds are up since the beginning of the year. It's hard to ignore gains of 40-50%.
But there is a current oft-repeated lie in these media reports that says that "gold stocks are pricing in a $350 ounce price right now, so gold better get there". This was reported in Thom Calandra's cbs.marketwatch.com commentary of May 3rd, 2002 and the source of the quote was "Ian McAvity, a longtime gold analyst and editor of Deliberations on World Markets in Toronto." I don't have anything against Thom Calandra, his bullish stance on gold has been informative and welcome.
But the media lie is so outrageous and absolutely ridiculous, it has me livid. Obviously, Ian McAvity and others are not saying that ALL gold stocks are now priced as if gold were trading at $350 per ounce, and obviously, Ian is not saying that gold needs to be $350 per ounce in order to find a gold stock to invest in. The problem is that is exactly what is being implied by this blatant piece of media propaganda. I believe that someone out there is powerful enough to pull the strings of those in the media and who does not want the little guy to start buying gold stocks.
The truth is that some gold companies are very overpriced, and others are still extremely cheap. The only way for the lying bastards to claim the general comment is not a lie, is to say the comment is based on an overall average of gold stock prices. But, of course, there is no need to invest in averages, and no need to invest in expensive gold stocks.
So, which is which? First of all, let's remember that averages are strongly skewed in the direction of the large companies. The total market cap of the gold mining industry is about $45 Billion. Barrick gold (ABX), the notorious hedger, has a market cap of 11.4 Billion and has a P/E ratio of 191. Anglogold (AU), another long time hedger that is now trying to reduce hedging, has a market cap of 6.2 Billion and a P/E of 57. Newmont (NEM), also still hedged, but less so and getting better, (P/E unavailable) has a market cap of 5.8 Billion. Together, these three companies have a market cap of 23.4 Billion. So any general comment about how "gold stocks" in general are priced, which might actually be a comment about the average of the industry, will likely include these three, which are certainly overpriced.
In fact, it is the relatively lackluster performance of these three which has prevented the gold funds from reporting earnings of well over 100% for the first quarter, as they should have done if they were loyal readers of the gold-eagle.com forum.
A fund that invested about $10,000 into ABX, AU, and NEM on Jan 1, 2002, or more specifically, 208 shares of ABX at 16 or $3,328 worth, 190 shares of AU at 17.5 or $3,325 worth, and 175 shares of NEM at 19 or $3,325 worth, for a total of $9,978, would now be worth $15,212, a gain of 31% for ABX, 67% for AU, and 57% for NEM, for a average total gain of 52%.
A fund that invested about $10,000 into DROOY, HGMCY, and GOLD (all three of which have been touted here at GOLD-EAGLE, and which I have been fortunate enough to invest in precisely because I have been a loyal reader) on January 1, 2002 or more specifically, 2438 shares of DROOY at 1.35 or $3331.8 worth, 512 shares of HGMCY at 6.5 or $3,328 worth, and 701 shares of GOLD at 4.75 or $3,329.75 worth for a total of $9,989.55, would now be worth $27,231, a gain of 233% for DROOY, 117% for HGMCY, and 168% for GOLD, for an average total gain of 173%.
Thank you, thank you, thank you, Mr. Vronsky and Mr. Westerman!
Intuitively thinking, an investor looking at those relative rates of returns might be fooled into believing that DROOY, HGMCY and GOLD, since they moved up the most, must now be the most overpriced, (and be taken in by the media lie) but that is exactly the opposite of reality.
In contrast, DROOY, HGMCY and GOLD are not overpriced, and are still priced as if gold were about $290 per ounce or less, the average price for gold in the first quarter, 2002!!!
Earnings reports have just come out on all three for the first quarter, and enough analysis has been done by other people more capable than I which indicates that the P/E ratios for these companies in the first quarter, if annualized, are as follows:
DROOY, P/E still NA. If the expense of delivering into their hedge book were not included, and they should be unhedged by June 2002, Net cash operating profit would have been about $23 million or 13.8 cents a share: 4.49/(13.8 x 4), for a P/E of 8.1.
HGMCY, P/E about 9.8 for the first quarter: 14.10/(.36 x 4).
GOLD, P/E about 15.61 for the first quarter: 12.74/(.21 x 4).
Now, it is obvious to me that these last three companies, are still not overpriced when they have such low P/E's at the moment based on a quarter when the gold price was about $290. Since bonds are not paying anywhere near 10% these days, finding a stock with a P/E of 10 or lower in a company with rapidly growing earnings is an outstanding investment at a wonderfully low price! If these companies have quarters when the gold price averages out at $312 instead of $290, obviously, their P/E's, and stock prices will be even better. Basically, with P/E's under 10, these companies are priced better than if gold were trading at $290 per ounce!!!
This is why I am so sick and tired of reading how gold companies are already priced as if gold were trading at $350 per ounce, because obviously, it's just not remotely true, unless when they say "gold companies" they are thinking mostly of overpriced gold stocks like Barrick.
Disclaimer: I am not a licensed investment advisor. I am not a broker. I hold substantial positions in precious metals and stocks of companies that invest in precious metals. I stand to personally benefit from any rise in the price of precious metals. I am biased against what I consider to be the fraud of fiat money. I am biased against the fraudulent practice of creating money out of nothing. I am biased against debt, particularly when money is lent at any interest rate whatsoever, a practice called usury.
For a list of many reasons why I believe now is a good time to buy gold and silver, see my web site at silverstockreport.com
Jason Hommel can be reached for further comment at firstname.lastname@example.org