What are we looking for?
Gold producers operating at lower costs.
As we have seen with the sharp drop in gold prices in recent months, all that glitters is not gold stocks. At the current price of gold, it is difficult for many producers to meet their all-in sustaining costs, a common measure of how much it costs the company produce gold on a per-ounce basis. In fact, many companies are actually losing money and faced with the decision of whether to close certain mines.
At Lorne Steinberg Wealth Management, we decided to take a look for low-cost gold producers that are also trading at attractive valuations.
The screen
Using S&P Capital IQ, we screened for Canadian gold producers that had a market capitalization of $500-million and higher. We wanted the screen to display the all-in sustaining costs for all these companies. These costs are expressed in U.S. dollars in order to make for an easy comparison to the current price of gold. As a measure of valuation, we also wanted the screen to display the forward price-to-earnings ratio and the price-to-book value of the companies on our list. Finally, we wanted to see how all these stocks had performed over the past year.
What we found
To no surprise, most of the companies in our screen have seen their share price take a severe beating over the past year. It should be noted that even by taking all-in sustaining costs into account, this does necessarily provide the full picture. This figure excludes interest costs and corporate taxes. Once those costs are included, the real costs of mining gold are even higher. The market is arguably aware of this. That would explain why even the producers that are seemingly still able to produce gold at a cost below the current market price have also seen their share price collapse.
One stock that stands out in terms of recent performance is Centerra Gold Inc. While Centerra is a Canadian company, its prime asset is the Kumtor gold mine in Kyrgyzstan. Kumtor, as implied by the table, is one of the lowest-cost mines in the industry. The increase in Centerra's share price reflects some progress in its dispute with the Kyrgyzstani government over the ownership of the mine. Nevertheless, the market will continue to apply a discount to Centerra's valuation simply due to the fact that the bulk of its production comes from a developing country, with what are perceived to be lower standards of corporate governance.
As always, investors are advised to do their own research before purchasing any of the stocks listed here.
Samuel Oubadia is a portfolio manager at Lorne Steinberg Wealth Management in Montreal.