Money Morning Article of the Week
by Tara Clarke, Money Morning
Consider Osisko Mining Corp.'s (TSE: OSK) 83.44% year-to-date gain, Primero Mining Corp.'s (NYSE: PPP) 69.14% rise, Agnico Eagle Mines Ltd.'s (NYSE: AEM) 45.75% gain, B2Gold Corp.'s (TSE: BTO) 34.86% gain, or Goldcorp Inc.'s (NYSE: GG) 29.4% uptick.
But we knew gold mining stocks were poised to deliver eye-popping returns. Miners, after gold's 28% price drop in 2013, went through a strict round of cost cutting in order to increase profitability.
Money Morning Resource Specialist Peter Krauth said in April that
"The past couple of years have seen considerable pressure on most gold equities, thanks in large part to a declining, then consolidating, gold price. That became a major challenge to gold miners as they've tried to grow production despite falling gold grades."
Gold mining companies took to costs with a machete and slashed wherever possible, to weather the storm for an extended rout in prices.
"Gold mining companies had to downsize staff, axe projects, and even rationalize selling non-core assets. As a result, now they are much leaner, and will be much more profitable when commodities prices rise again."
While many gold mining stocks faltered in the past few years, those companies that managed to strengthen operations during the down gold market were poised to capitalize on gold prices' rise in 2014.
Even with a strong return so far in 2014, the gains for some gold mining stocks are just beginning...
Krauth said before the results that
"I am curious to see how these stocks perform, as they are some of the least risky in the mining space, they have lots of cash, and both are well-positioned to benefit from the weakness of the last three years. Both could advance even if gold is stagnant, due to their growth profiles."
Here's how they did - and why both are "Buys" for investors in gold mining stocks ...
The Bullish Earnings Numbers for these Two Gold Miners
Franco-Nevada Corp. posted stronger-than-expected second quarter 2014 earnings after the bell on Wednesday. It announced earnings per share (EPS) of $0.24, besting the consensus projection by $0.01. In the same quarter a year before, Franco-Nevada reported EPS of $0.22 a share. The company's revenue of $107.70 million was up 15.4% compared to the same quarter in 2013, and crushed the consensus estimate of $96.36 million.
But Krauth was most interested in FNV's profit win.
"For Franco-Nevada, I'm looking for a small uptick in profit. If we can get that, it will be the first quarter after five consecutive declining quarters."
And increase profit is what FNV did.
Net income for Q2 came in at $36.9 million, compared to $21.6 million the same period a year ago.
Krauth sees thriving royalty companies like FNV as "Buys," and he isn't alone.
Tocqueville Asset Management senior research analyst and portfolio manager Douglas Groh said to Streetwise Reports on Monday that
"Royalty companies such as Franco-Nevada mitigate risk and maximize discovery upside. These companies... have a direct interest in ore deposits and the revenues or profits from the operations that mine those deposits, often before shareholders of the mining company that operates those mines...The business model can also allow for greater return potential."
As of midday Thursday - the day after earnings release - FNV stock was up 3.02% at $59.98 a share and was up 5.74% on the week.
Another royalty company, gold miner Royal Gold, reported Q4 2014 earnings before opening bell Thursday morning. Its EPS of $0.23 a share missed analyst estimates by $0.06, and its revenue of $70.14 million missed estimates of $77.30 million.
However, revenue was up 22% compared to the same quarter a year earlier, and that's exactly what Krauth was looking for.
"For Royal Gold, I'm looking for a substantial increase in revenue, given that three projects are likely to have grown output considerably, more than offsetting a potential drop from other projects."
Additionally, Royal Gold's EBITDA ("Earnings Before Interest, Taxes, Depreciation, and Amortization") - which is generally a good measure of a company's profitability - came in at a massive 85% of revenue.
"RGLD is a $5.03 billion royalty company, with interests in more than 200 production, development, and exploration-stage royalties. Royal Gold boasts $680 million in working capital and $350 million in undrawn credit it can put to work."
And according to Krauth, Royal Gold Inc. stands as one of the best companies to benefit from the rampant geopolitical turmoil taking place in Eastern Europe right now.
RGLD stock has jumped nearly 70% year to date and was up 1.19% at $78.02 a share midday Thursday following earnings release.
NOTE: This week, Krauth identified two junior gold mining stocks he expects will give investors more than ten times the returns of the S&P 500 in coming months. You can get those picks here...
- Streetwise Reports: John Hathaway and Doug Groh: Buy Gold Like It's 1999