Mining companies are mostly undervalued in this market. While the spot price of silver is lagging with other precious metals, gold prices are holding up well, and there remains a lot of anticipation about an upward price spike in that commodity.
If I had one precious metal in which to speculate it would be gold, even at its current level. Mining companies still have lots of cash on their balance sheets, and the way the world is going, gold is likely to become a reserve currency. If things in the global economy get better, then gold will accelerate in price; if they don’t, global investment risk should keep gold prices right around current levels. The stability in today’s gold prices is very helpful for mining companies that can better plan their operations with an underlying commodity that’s not going down.
Surveying the universe of mining stocks, I definitely view the group as undervalued. There are now a number of well-managed mining companies with solid production growth that are cheaply valued on the stock market. This is the way it works in the mining sector; the Street basically ignores the group until the spot price of gold has already moved, and then institutional investors pile in. I’d be a buyer of select mining companies in this market at this time, and it’s because of the value, not my expectation for rising gold prices.
Even large-cap mining companies are currently taking it on the chin. Consider Barrick Gold Corporation (NYSE/ABX), which was trading around $47.00 a share at the beginning of the year. Currently trading around $32.00 a share, the spot price of gold is down only slightly since January, yet ABX is down about 50.0%.
Barrick Gold is currently trading at a price-to-earnings ratio of less than eight and has a dividend yield of 2.5%. The stock is right at its 52-week low and is one of the few mining companies with solid expectations for earnings growth in 2013. Barrick Gold is a large-cap stock, but it clearly illustrates how institutional investors have abandoned the gold sector. In my view, the trading action in the majority of mining companies highlights an attractive new entry point for investors.
Spot gold looks like its getting ready for a breakout on the charts, but to do so it will need a catalyst. I think there’s a good chance for gold to break out of its current trading range based on new policy action from the Federal Reserve and in Europe. As a group, mining companies have been beaten up pretty good, and valuations are attractive. As I say, gold needs a catalyst for another big move. I think one is not too far off.