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Number Cruncher

Finding unprecedented value in gold stocks Add to ...

What we’re looking for

Gold producers that are good value plays.

What we found

This screen was created by Michael Bowman and Allan Meyer, portfolio managers at Wickham Investment Counsel Inc. It looks for companies that have low price-to-earnings ratios, low debt and healthy cash balances.

“We are now finding a large number of gold stocks are hitting our value screens, something that has been unheard of in the past,” Mr. Meyer says. “Of the 715 companies that we follow, on a value screen, these gold companies are in the top quartile.”

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He points to “substantial” increases in 2012 earnings over 2011 – on average, the increase in the earnings per share for the 17 companies is 62 per cent.

In addition, nine of the 17 miners’ 2012 P/E ratios are in single digits. Ten of the 17 have absolutely no debt, and nine of the 17 have cash on the balance sheet that is more than 10 per cent of the share price, Mr. Meyer says.

The last column shows that nine of the 17 companies also pay a dividend.

The surging price of gold has lifted earnings substantially. “Companies are yanking the stuff out of the ground at $400 (U.S.) an ounce and selling it at $1,700 an ounce,” Mr. Bowman says. “In addition, these 17 companies are doing the right things, like paying down debt.”

Another reason the miners are popping up on the value screen is that gold stocks have not risen as fast as the price of the precious metal has.

“Gold stocks have underperformed bullion because there is stock-market risk in buying gold stocks, which is not an issue if you buy bullion. Unsystematic risk is also a factor, and is evident in things like labour costs, political risk and mine life, just to name a few,” Mr. Bowman says. “If investors believe bullion is going higher, buying the metal itself eliminates both risks.”

But there are also advantages to buying stocks, which would make these miners more attractive, he says. “We need to keep in mind that there are times, like now with those 17 companies, where companies presenting value will outperform bullion, and stocks provide greater leverage to the price of gold.”

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