Like big oil companies, big mining companies are valued on the extent of their reserves. At the end of 2012, mining companies wrote down more than $50 billion in assets, and most of that was in aluminum, iron ore, copper and other base metals. The gold that was counted for reserve calculations in 2013 was variously valued by the mining companies, from a high of $1,700 to a low of around $1,200.
As the miners prepare to report on 2013 results and project their budgets for 2014, they will be forced to re-evaluate the worth of their reserves based on a market price that is $500 an ounce less than it was a year ago.
Barrick Gold Corp. (NYSE: ABX) has seen shares fall about 50% in the year to date. Barrick valued its gold reserves at $1,700 an ounce at the beginning of 2013, and has since dropped its estimate of gold prices to $1,250 an ounce. The stock closed on Friday at $17.46, and the consensus price target is around $20, for an implied gain of 30%. Shares have traded in a range of $13.43 to $36.08 over the past 12 months. Fiscal year 2014 earnings per share are estimated at $2.00, and the stock is valued at about 8.7 times expected earnings. The company’s founder and chairman said last month that he is stepping down at the company’s annual meeting next spring.
Goldcorp Inc. (NYSE: GG) stock is down about 41% since the start of the year. Of the four gold mining stocks we are looking at, it is been the best performer (barely). Goldcorp valued its gold reserves at $1,350 an ounce at the end of 2012. The stock closed at $21.59 on Friday, and the consensus analyst price target of around $30.80 implies a potential upside of about 43%. Shares have traded in a range of $20.54 to $38.61 over the past year. With a fiscal year 2014 earnings per share estimate of $1.04, it is valued at 20.76 times next year’s expected earnings.
Newmont Mining Corp. (NYSE: NEM) shares have dropped 49% since last January. At the end of last year, Newmont calculated its reserves value using $1,400 an ounce for gold. The stock closed at $23.59 last Friday, and the consensus price target for the shares is around $30.30, indicating a potential upside of 28%. The 52-week trading range on the stock is $22.34 to $47.59. With a fiscal year 2014 earnings per share estimate of $1.68, the stock is valued at nearly 14 times expected earnings.
Yamana Gold Inc. (NYSE: AUY) has also suffered a 49% drop in its share price over the past year. At the end of last year, the company valued its reserves in a range of $825 to $1,400 an ounce, depending on the project. The stock closed Friday at $8.72, and the price target is around $12.20, for an implied upside of 40%. The stock’s 52-week trading range is $8.31 to $18.23. At a fiscal year 2014 earnings per share estimate of $0.51, Yamana is valued at 17.25 times expected earnings.
The write-downs that gold miners took in 2012 were primarily related to overpaying for properties the companies bought in the dozen years that the price of gold rose steadily. What will happen now is that the companies will have to reconsider the value of the gold in those already devalued projects. The only gold miner valued at all realistically is Barrick at around eight times forward earnings, but even that is likely an optimistic outlook, given the reserve devaluation that is just ahead.
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