Mining Canada's gold producers for hidden value

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With the price of gold over $1,080 (U.S.) an ounce and rising, enthusiasm for gold stocks has become pretty intense.

Canada is home to a large number of gold mining companies, including five out of 10 of the global leaders. Buying gold itself or a gold fund is always an option, but the companies themselves can add an extra dimension of profitability.

The problem is there are so many gold miners and such a variety of criteria for evaluating those companies: price, forward earnings, resources, production, cash flow, profitability, life of the mine, quality of management, local government stability (or lack of it) debt, hedge book, to name just a few. And the price of gold, while it will lift all the boats, is not the only factor in generating returns. So what are the key criteria? And which companies measure up?

Squarely in the spotlight are Canada's top five gold producers based on market capitalization: Barrick Gold Corp. , Goldcorp Inc. , Kinross Gold Corp. , Agnico-Eagle Mines Ltd. , Yamana Gold Inc. . These five are also among the world's top 10. They are truly global companies, as the vast majority of their assets are in continents other than North America.

These are good companies with good track records. But some are better investments than others. A prescient investor who bought Goldcorp in 2001 has reaped a return of 1,551 per cent. The Vancouver-based company has grown from a market cap of $274-million (Canadian) in 2001 to nearly $30-billion today. Goldcorp's unreal growth is a testament to former chief executive officer Ian Telfer's nimble expansion-mindedness more than the price of the commodity. Management is clearly a key criterion in picking a winning stock.

Kinross CEO Tye Burt stresses the importance of cash flow over earnings. "We're not growing just to get big," he said at this year's annual meeting in May. "That is not the objective. It's to get bigger margins and better profits."

The best way to do that is to increase production, and Kinross, which has 11 mines on three continents, is pursuing a 2010 target of increasing gold production 33 per cent from 1.8 to 2.4 million ounces a year. Agnico-Eagle and Yamana also plan to boost output this year: Agnico-Eagle hopes to double production from just under 300,000 ounces to just under 600,000 ounces, while Yamana, with six mines in North and South America, is hoping to break the million ounces barrier, with a 39-per-cent increase over 2008 to 1.1 million.

Of course, these companies are all focused on the next great criterion: keeping the cost of production down. In announcing his second quarter results at the end of August, Mr. Burt singled out the benefits of bringing that cost down: "We're proud to have reduced costs by $32 (U.S.) per gold equivalent ounce year-over-year and to have increased margins to a new record of $481 per ounce, especially given that we do not benefit from higher base metal prices and by-product credits," he said. Cash flow per share increased by 83 per cent year-over-year, and Kinross was able to boost its dividend per share as well, 5 cents semi-annually, up 25 per cent from the previous year.

Yamana, the smallest of the big five with a market cap of $8.5-billion (Canadian), also has one of the lowest costs of production, at $352 (U.S.) per ounce in the second quarter. Yamana CEO Peter Marrone looks forward to even lower costs in 2009, thanks in part to suppliers' willingness to accept lower prices during the recession.

Barrick Gold, with a market cap of $41.3-billion (Canadian), is not only Canada's largest gold producer, it is the world's largest as well. But it has been held back in recent years by its reliance on a hedge book that has become increasingly costly to maintain. That all changed in October when new CEO Aaron Regent eliminated the hedge book, raising $4.4-billion in the largest equity sale of the year and taking a $5.6-billion (U.S.) charge in the process. But Barrick's hedging practices have kept the company's share price artificially low and now Barrick can join the ranks of the other unhedged Canadian companies who all enjoy full exposure to the skyrocketing spot price of gold.

Good management, the prospect of increased production, keeping costs down, and being in position to take advantage of the record gold price are all important, and so is the prospect of a steady supply.

Goldcorp, for one, is fortunate because 70 per cent of its production comes from stable environments in Mexico and Red Lake, Ont. But this is a factor that provides management with many a sleepless night, as they scour the inhospitable corners of the planet looking for an increasingly scarce resource.

Goldcorp is working to keep its assets growing and stable by owning a 60-per-cent interest in a Terrane Metals gold and copper property near Prince George, B.C. If it gets federal environmental approval, as expected in the first quarter of 2010, the $915-million (Canadian) Mount Milligan project will be the first new mine in British Columbia in the last 10 years, underscoring the difficulty in getting gold mines built, especially in environmentally conscious North America.

Hot on the heels of the big five are the juniors, although there are another 12 companies with market capitalizations greater than $1-billion, so perhaps "junior" is not the right word. The next winner is lurking among that group - paying close attention to the factors that allowed the big five to thrive is the key to striking gold … corp.