Gold Miners' Stocks Are Hit by Strife, but Hold Long Term Value

NEW YORK (TheStreet) -- Although gold mining stocks are underperforming, analysts believe the long-term outlook is significantly higher.

Market Vectors Gold Miners ETF (GDX) has not risen as expected over the past few weeks while geopolitical risks have heightened, nonetheless, the index remains an appealing long term investment.  

The companies most heavily weighted in the gold miners’ index are Goldcorp (GG), Barrick Gold (ABX), Newmont Mining  (NEM), Silver Wheaton (SLW), Franco-Nevada (FNV).

READ MORE: Randgold Is the Gold Standard in Gold Mining, More Than Newmont or Barrick

The sudden convergence of various geopolitical narratives such as Argentina’s default, strife in Gaza, violence in Iraq, and Russia’s buildup of soldiers close to Ukraine’s border led many investors to believe that SPDR Gold Shares (GLD) would undoubtedly outperform other asset classes.

Gold, however, languished below resistance levels as investors instead fled to iShares Barclays 20+ Year Treasury Bond (TLT) and PowerShares DB US Dollar Index Bullish (UUP). Gold is priced in dollar terms, and is therefore weakened when the real value of the dollar increases.

Europe’s exposure to Russia and weakening economic fundamentals drove money out of both the region’s equity indexes, as well as its currency, CurrencyShares Euro Trust (FXE). This left investors searching for a safe-haven developed market, eventually fleeing in mass to U.S. assets.

READ MORE: 3 Stocks Driving The Metals & Mining Industry Higher

GLD Chart
GLD data by YCharts

Gold and gold mining stocks generally trend in the same direction, due to the sector's exposure to gold prices. As gold has underperformed recently, so have mining companies. Changing perspectives, however, from a short-term trade view towards a long-term investment view, gold mining stocks present an intriguing opportunity.

Recently, the technical team at Oppenheimer stated they were more bullish on the long-term prospects of gold miners going forward than the precious metal itself. In their new report, Oppenheimer analysts cited Market Vectors Gold Miners ETF and three top stocks to buy in the gold mining arena.

The three companies are listed below:

Goldcorp: Analysts believe the miner has the ability to pursue an acquisition to refill its longer-term project pipeline. Meanwhile, Goldcorp has been altering its mine plans, cutting spending and disposing assets in order to reduce costs and focus on the most profitable production.

Randgold Resources (GOLD): The miner had another record production quarter from its flagship Loulo-Gounkoto complex in Mali. Increased production has made achieving its guidance for the year a real possibility. At the same time, the developing Kibali mine in the Democratic Republic of Congo remained on track to reach its forecast target despite disruptions. 

Royal Gold (RGLD): The miner’s portfolio consists of 202 properties on six continents, including interests on 36 producing mines and 21 development stage projects. The projects could lead to long term value creation for the company’s investors.

READ MORE: 10 Stocks Carl Icahn Loves in 2014

The Oppenheimer team believes that the gold mining sector has developed a strong bottoming formation with its price action. If support levels should hold, investors may return to buying the sector as they come to see value in its battered companies.

GDX Chart
GDX data by YCharts

At the time of publication, the author had no position in any of the funds mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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TheStreet Ratings team rates RANDGOLD RESOURCES LTD as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate RANDGOLD RESOURCES LTD (GOLD) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its solid stock price performance, largely solid financial position with reasonable debt levels by most measures and growth in earnings per share. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow and disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 28.60% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
  • GOLD's debt-to-equity ratio is very low at 0.00 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.08, which illustrates the ability to avoid short-term cash problems.
  • RANDGOLD RESOURCES LTD has improved earnings per share by 5.3% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, RANDGOLD RESOURCES LTD reported lower earnings of $2.99 versus $4.65 in the prior year. This year, the market expects an improvement in earnings ($3.41 versus $2.99).
  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Metals & Mining industry and the overall market on the basis of return on equity, RANDGOLD RESOURCES LTD has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
  • Net operating cash flow has decreased to $49.77 million or 45.91% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.

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