2 Gold Stocks Even Better Than Gold Itself

Bob Bogda's picture

Tuesday, October 8, 2013 - 1:00pm

by Bob Bogda

Sometimes I feel as if I have the best job in the world, especially each time the calendar turns.

You see, this is when most of the fruits of the team's labors come together here at StreetAuthority. It's when we publish many of the newsletters we've been working on for weeks or longer.

The first week of the month always offers an opportunity for me to step back and soak in the collective investing advice of some of the top stock market strategists in the country.

I feel like sharing the wealth this week...

In Scarcity & Real Wealth, Dave Forest makes a compelling case for investing in gold companies -- especially if you think we're headed for another crisis a la 2008, when cash was suddenly in short supply as spooked lenders battened down the hatches.

Owning precious metals outright is a "decent solution," as Dave put it, but owning the companies that dig it out of the ground can be an even better way to prosper through tough times. Here's why, in Dave's words:

"Gold mining companies are at some of their lowest valuations ever. In some cases these discounted share prices are warranted -- high-cost producers are struggling today at lower bullion prices. But a number of firms are still making good money, even with gold at $1,300 per ounce. Look at a company like my portfolio holding Kinross Gold (NYSE: KGC), which made nearly $450 million in cash during the second quarter of 2013 -- even as gold prices plummeted.

"A big part of reason I'm bullish on good producers like Kinross is that they have multiple means of generating significant profits for investors.

"Obviously, one way is if gold prices go up. But another, less discussed scenario is that we may see operating costs in the gold mining sector come down -- a consequence of projects being put on hold in the current depression suffered by the sector. That means margins for mining companies should improve -- even if gold prices don't increase.

"This 'double-barreled' investment opportunity is why I believe these companies give us more ways to win than simply owning physical gold."

One of Dave's favorite gold companies in the current environment is Newmont Mining (NYSE: NEM).

For one thing, Dave points out, Newmont is cheap. At today's share price of about $27, Newmont can be purchased at an 8.1 multiple to cash, making the $13.5 billion miner one of the lowest valuations in the gold space right now.

At the same time, Newmont is one of the few gold producers with the ability to cover capital expenditures from cash flow. During the first half of the year, Newmont spent $1.1 billion on capital costs at its mines around the world and had nearly $1.2 billion left over.

Even if this spending pace keeps up for the rest of the year, Dave notes, Newmont can cover these expenses from cash flow without dipping into its cash reserves or taking on more debt.

The ability of Newmont to draw from an established base of large-scale, low-cost production operations in Nevada and Peru also gives the company an edge.

"Having proven core operations gives the company the certainty it needs to survive and prosper in tough times," Dave writes. "The last thing you want during a period of lower metals prices is surprise cost overruns or production cuts -- the kinds of things that often happen as newer, less established mines ramp up."

(Note: Dave talked about some of his favorite natural resource investments in an interview last week with BNN, Canada's top business network. To view the five-minute segment in its entirety, click here.)

P.S. In a recent issue of his Scarcity & Real Wealth advisory, Dave Forest told subscribers about a gold miner that he thinks has fallen too far compared to the price of gold -- especially when you consider that it's one of the top low-cost producers in the sector. Out of fairness to subscribers, we can't reveal the name of the company here -- but to get all the details, click here.

Bob Bogda does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of NEM, KGC in one or more of its “real money” portfolios.