- Seeking Alpha

Posted: 15 Aug 2014 09:11 AM PDT

Summary

Gold and a gold-linked ETF will provide attractive returns in the future; however, gold-mining stocks will outperform these two options.
Fundamentally, Newmont Mining Corporation and Allied Nevada Gold Corporation are trading at discounted prices.
Simple technical analysis of these two stocks can provide investors with more confidence that downside risk is minimized at these price levels.

There are many ways to gain exposure to the gold market; owning the metal itself, an ETF that holds gold and gold-mining equities are among the most common. While I do believe that the two former will provide attractive returns in the future, opportunities with greater upside potential are present in the latter. Gold-mining equities as a whole - represented by the two popular ETFs, GDX and GDXJ - have significantly underperformed gold from the peaks in 2011 to present. Gold has declined nearly 37% from its high in September 2011 (slightly below $1900/ounce) to its local low made at the end of 2013 (slightly below $1200/ounce). A similar decline - one of just over 38% - was recorded in GLD from its high to its local low in this same time period. Thus, while GLD does not exactly match the price of gold in terms of percent gains/losses, it is a very close indicator and can be used in the place of the spot gold price for comparisons. As mentioned, gold-mining stocks have underperformed gold and suffered worse high-to-local low percent losses during this time period. Fig. 1 compares these losses. One can see that gold-mining stocks as a whole still remain depressed. Due partly to this reason, I believe gold-mining stocks will outperform a rise in the price of gold.

Figure 1

(click to enlarge)

Significant price depreciation alone does not necessarily justify the conclusion that an asset is cheap. However, I do believe that starting a search in a depressed sector can be advantageous when one is looking for cheap assets. Thus, the gold-mining sector is a good place to look for cheap stocks. Research will reveal more of the picture and can allow investors to "narrow" their search and pick attractive opportunities. By looking at a variety of factors, I have found 2 gold-mining stocks that I believe possess great upside potential and should be considered if one believes that a higher gold price is imminent.

Newmont Mining Corporation (NEM)

Of the large-cap miners, I feel that Newmont is the most attractive. The company is working to cut costs and their efforts have manifested in recent earnings announcements. In the second quarter of 2014, costs applicable to sales for gold (per ounce) and copper (per pound) were reduced by 17% and 67%, respectively, compared to the same period in 2013. Gold (per ounce) costs applicable to sales outlook was further reduced by 3% to $720 from $760 in 2014. They also achieved cost savings of $359 million in gold all-in sustaining costs.

While cost cutting is important in a lower-priced gold environment, expansion cannot be forgotten and is vital for the long-term success of Newmont. The decision to develop the Merian project in Suriname is encouraging. The Board of Directors approved full funding of the mine and it is expected to begin production in late 2016, with average life of mine estimated gold production of 300,000 to 400,000 ounces per year on a 100% ownership basis. The government of Suriname has the option to purchase a 25% equity ownership in Merian.

Fundamentals

Simply put, Newmont, along with many other miners, was expensive during its run up to its high in late 2011. Some key price ratios through this time period, seen in Table 1, show this. A seemingly ever-rising gold price may be to blame, or maybe investors felt that Newmont should keep up with the high valuations also seen in its peers; either way, one must always take into consideration fundamentals that show a stock is expensive. This is much easier said than done.

	Average P/E	P/S	P/B
12/07	-22.94	3.99	2.93
12/08	22.37	2.99	2.53
12/09	17.67	2.99	2.13
12/10	13.33	3.22	2.24
12/11	59.88	2.92	2.3
12/12	12.29	2.35	1.66

Today, some of these ratios are significantly lower than they were 3 to 4 years ago. Two of particular interest are Newmont's P/S and P/B values of 1.73 and 1.29, respectively. Also, Newmont's low EV/EBITDA of 5.34, in general and in relation to its peers, provides more evidence that it is an attractive pick in an attractive sector. These valuations, along with my belief that a higher gold price will arise, make Newmont an attractive pick.

Simple Technical Analysis

I believe that simple technical analysis can sometimes provide more upside potential while lowering the downside risk - thus, using it to your advantage should at least be considered. Newmont's 52-week price range per share is $20.79 - $34.27. The low was set on 2/6/14 and the high was set on 8/27/13. At the closing price of $27.06 on 8/12/14, it is trading around 30% off its 52-week low. A rough reverse head-and-shoulders pattern can be seen in Fig. 2 below. A break above the neckline would be bullish.

Figure 2

(click to enlarge)

I don't think it will test its low of $20.79 anytime soon. I generally like buying as close to a 52-week low and/or a technical support level as possible. I'd like to see it fall back to around $23, which would be close to 10% off its 52-week low; however, I think this is also unlikely. I do think it has a lot of running room at this price. I will be looking for a break above the neck line and in the event of this, a test of and hold above that neckline.

Allied Nevada Gold Corporation (ANV)

Allied Nevada is a favorite of mine. At the price of around $3 per share, I believe the risk profile is very favorable. A higher gold price, a buyout, or both will allow for an appreciation in the undervalued share price of this gold miner.

Fundamentals

Just by looking at some basic fundamentals, Allied Nevada seems very cheap. As of 8/12/14, it is trading at less than half its book value of $7.53 per share, has a P/S of 1.01 and an EV/EBITDA of 11.78. Also, Fig. 3 below adds to the evidence that Allied Nevada is currently trading at a significant discount.

Figure 3

(click to enlarge)

This evidence begs the question of why this company is trading at such a discounted price. The stock is heavily shorted - 40% of float - as many investors are concerned about the debt levels and the lack of funding for the expansion at Allied Nevada's primary mine, Hycroft. In April 2014, a prefeasibility study was completed showing an after-tax IRR of 26.5% and net present value at a 5% discount rate of $1.7 billion. A gold selling price of $1300 per ounce and a silver selling price of $21.67 per ounce were assumed in calculating these values. The completed feasibility study should become available in the fourth quarter of 2014 and it is something that investors should put on their radar. As mentioned, the funding for this expansion (initial expansion capital of around $1.3 billion) is a concern and will most likely have to be provided via a buyout or a sale in the stake of the mine. However, after reading the transcript of the recent conference call, I am confident that they will be able to survive long enough to find a way to fund the expansion of Hycroft while keeping the best interests of the shareholders in mind.

Simple Technical Analysis

Allied Nevada's 52-week price range per share is $2.61 - $6.70. The low was set on 6/4/14 and the high was set on 3/14/14. At the closing price of $3.16 on 8/12/14, it is trading around 21% off its 52-week low; however, I believe it has a support level in the range of $2.90 - $3.00 and that this support level should be of greater interest than the 52-week low. Using the $2.90 price, it is trading around 9% off this support level. Due to this, I believe this is a very favorable entry point. The presence of this support helps to minimize the downside risk.

Disclosure: The author is long ANV. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More...)

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<b>Gold Prices</b> From 1971 To 2014 in 3 Waves | Gold Silver Worlds

Posted: 31 Jul 2014 01:31 PM PDT

Ignore the hype regarding gold, bonds, booms and busts, hope and chains, "shock and awe," stock market crashes, "money honey" commentary, and ignore the politicians. Don't obsess over High-Frequency-Trading and market manipulation. Instead, focus on the big picture as shown in the following chart of monthly gold, which has been divided into 3 phases since 1971.

Phase 1: Gold rallied from about $42 in 1971 to over $800 in 1980, thanks to massive money printing, debts, deficits, wars, and a loss of confidence in the US dollar.

Phase 2: Gold prices crashed subsequent to the bubble of 1979-80, and then drifted lower for about 20 years. It double bottomed in 1999 and 2001.

Phase 3: Gold rallied off the 2001 low of about $255 to over $1,900 in August 2011. Since then it has corrected to under $1,200, and double bottomed in June and December 2013. Current price is about $1,300.

How Will Gold Prices Change in the next 3 – 5 Years?

Option 1: Gold prices will continue rising, erratically of course, within the green "megaphone" pattern shown above. In my opinion this option is the most likely unless we descend into a global deflationary depression and/or nuclear winter, which the politicians and bankers will do "whatever it takes" to avoid.

Option 2: Gold prices continue falling much like they did subsequent to the 1980 bubble high. I consider this option unlikely.

What Else Supports Option 1 – Higher Prices?

The rally into 2011 does not resemble the parabolic bubble blow-off into 1980. The drop in prices since 2011 looks like a correction, not a post-bubble crash. Gold was not in a bubble in 2011.
Interest rates today are practically zero, but in the 1980 crash era US rates were at all-time highs. Economic conditions are quite different.
Monetary policy today is extremely loose, but in 1980 era it was, relatively speaking, tight.
The stock market in 1980 had been declining or flat for over a decade, while the stock market of today has enjoyed over 5 years of practically continuous rally.
In 1980 confidence in the US dollar and the financial system was fragile, while today it seems (perhaps undeservedly) much stronger.
Technical indicators (see graph below) suggest that long-term gold prices have been bottoming during the past year. Note the other examples of "over-sold" conditions in gold prices.

What Else Supports Option 2 – Lower Prices?

Various self-serving forecasts from investment and bullion banks suggest lower prices – at least until they have sufficiently loaded up on future contracts and can massively profit from the rally ahead. I remain skeptical of such prognostications.
The price chart shows that gold has been falling since 2011. Some people believe it will continue falling for another 10 – 20 years. However, with ever increasing debt, bond monetization, food and energy inflation, massive Chinese and Russian purchases, and increasing political instability, lower prices appear to be an unlikely outcome.
The Fed and most other western central banks would like stable or lower gold prices, so their unbacked debt based paper currencies appear less weak. Maybe they can manufacture another decline in the gold prices such as during April – June 2013, but that also seems unlikely.

CONCLUSIONS

This is not 1979 or 1980 when political and economic conditions were drastically different. Perhaps a better analogy would be about 50 years ago (1964) when the Vietnam War was escalating, US citizens were angry and marching in the streets, a gallon of gasoline cost 25 cents, coffee in a restaurant cost ten cents, and a decent middle-class wage was $2.50 per hour. The subsequent 20 years were life-changing and financially difficult for many people. Consumer prices increased drastically, the purchasing power of savings was destroyed, and people lost confidence in government and the US dollar.

Gold prices will rally much higher in the next 5 years. Jim Sinclair's initial target of $3,500 seems very likely by 2016 – 2019. If the powers-that-be choose hyperinflation to deal with their massive debts, then much higher prices are "in play."

There are many other options. For example, if you don't trust or like gold, a bank will pay you 1% interest each and every year if you invest in a Certificate of Deposit.

Additional Reading:
Silver Prices – Megaphone Patterns
Gold Elliott Wave Projection
Our Ponzi Economy
Huge Silver Spike

GE Christenson | The Deviant Investor

2 Attractive Alternatives To Play A Higher Gold Price - Seeking Alpha