Now that’s more like it. When I dropped Kinross Gold (KGC) from my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ on January 13 I said that what I wanted in a gold mining stock was a company with low production costs and rising production. Kinross, I opined, didn’t fit that bill any longer. (See my January 17 post http://jubakpicks.com/2012/01/17/sell-kinross-gold-kgc-in-my-long-term-jubak-picks-50-portfolio/ )

But my replacement for Kinross, Yamana Gold (AUY) does. The company’s cost of production is at the low end for the industry—at $450 a gold equivalent ounce in 2010–and it has one of the best profiles for increasing gold production among gold miners. That’s why I added it to the Jubak Picks 50 portfolio on January 13. (See my post http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ for all the changes to the portfolio.)

Low production costs for a gold mining company largely hinge on the richness of the ore grades in its mines. Read more

Sell Kinross Gold (KGC) in my long-term Jubak Picks 50 portfolio

My ideal gold mining investment would be a company that was expanding gold production and that was keeping costs low.

Kinross Gold (KGC) only fits half that description, which is why I sold it out of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on Friday, January 13. See my post http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/on January 13 for all the changes to the portfolio. (Today, January 17, shares of Kinross Gold fell 18.8% after the company announced that it would record a goodwill writedown on its Tasiast mine in Africa. Kinross acquired the mine as part of a 2010 acquisition of Red Back Mining. As of September 2011 the project had a book value of $7.1 billion of which $4.6 billion was goodwill.)

For the third quarter Kinross gold reported production of 648,000 gold-equivalent ounces, a 13% increase from the third quarter of 2010. That’s exactly what you’d like to see at a time of rising gold prices.

But production costs soared. Read more

Gold mining stocks add dividends as a way to compete with bullion ETFs

Gold mining companies are getting the dividend religion too.

They’re adding dividend payouts in an effort to close the “attractiveness gap” with gold bullion ETFs.

Back on November 25 I wrote about the general resurgence of dividends http://jubakpicks.com/2011/11/25/companies-re-emphasize-dividends-and-it-couldnt-come-at-a-better-time/ . Given the lack of any capital appreciation in the current market and an increasing cynicism among investors about stock buybacks, companies have started to increase dividend yields as a way to support share prices and keep on the good side of capital markets.

Gold mining companies have an added incentive. The rising popularity of gold bullion ETFs (Exchange Traded Funds) has come at the expense of gold mining shares. Investors who want to create a hedge on inflation or currency depreciation can use ETFs as their vehicle instead of buying shares of gold mining companies. The demand for gold ETFs has cut into the demand for gold mining shares so much that gold mining stocks have lagged increases in the price of gold. So, for example, while gold is 46% higher than it was in December 2009 (as of the close on December 13), shares of American Barrick (ABX) are just 26% higher.

But neither physical gold nor gold bullion ETFs pay a dividend and this seems to be how gold mining companies—some of them anyway—have decided that they can compete. Goldcorp (GG), for instance has increased its monthly payout to 3.4 cents a share from 3 cents in November 2010 from 1.5 cents a share in 2009. IAMgold (IAG) raised its dividend on December 9 to an annual 25 cents a share from last year’s 6 cents a share payout.

The most ambitious effort comes from Newmont Mining (NEM), which has pledged to link its dividend payout to the price of gold. Read more

Update Freeport McMoRan Copper & Gold (FCX)

In the short-term everything looks terrible for Freeport McMoRan Copper & Gold (FCX), a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ . Copper prices hit a new low for 2011 of $3.28 a pound on Friday, September 9. The HSBC/Markit Economics China Manufacturing Purchase Managers Index fell to 49.4 in September from 49.9 in August, signaling that China’s manufacturing sector, a big user of copper, had started to contract. (On this survey the 50 level marks the difference between contraction (below 50) and expansion.) Strikes have hit the company’s big Grasberg mine. The union originally said it planned on a month-long strike to force the company to pay higher wages, but now says that the work stoppage could go on for longer.

In the long-term, though, the picture looks totally different. Long-term copper demand continues to outstrip additions to industry supply. Codelco, the state-owned Chilean company that is the largest copper producer in the world, said on September 3 that “the global copper market is headed for its biggest deficit since 2004 as suppliers fail to keep pace with demand led by China.”

Investors, afraid that they’re about to see a replay of 2008 when copper and other commodity prices collapsed and shares of Freeport McMoRan fell to $8.40 in December from $56 in June, pushed the price of these shares to $32.55 at Friday’s close from $56 at the end of July.

I can’t tell you that this is as low as the stock will go. (It’s up today, September 26, by 1.8% as of 2:15 p.m. New York time.) Fear that the European debt crisis will slow global growth, that the U.S. economy will slip back into recession, and that China’s growth engine will slow significantly will keep pressure on copper prices in the near term. Copper could move lower and gold, well, gold is selling off as traders liquidate positions to meet margin calls from their brokers.

But I can tell you that the stock is now cheap on the fundamentals. For example, Jefferies just cut its estimate for 2011 earnings per share to $5.30 from $5.66. At that lowered estimate the stock traded Friday at a price to earnings multiple of 6.1. The mid-point of the stock’s price-to-earnings range over the last 10 years is 10.4, Standard & Poor’s calculates. At that mid-range P/E ratio, Freeport McMoRan would sell for $55 a share, almost 70% above Friday’s close of $32.55.

And this is a company with a lot sounder fundamentals today than it had in 2008. Long-term debt, for example, was $9.2 billion at the end of 2008 but was just $4.7 billion at the end of 2010. Free cash flow was $5.5 billion for the trailing 12-months.

I think the current price of $32 is a reasonable place—even with today’s risk—to begin building or to add to positions. Keep some powder dry so that you can add shares if this bargain becomes even more of a bargain. But adding a position or adding to a position (since the stock is already a member of my Jubak’s Picks portfolio) in Freeport McMoRan to a portfolio at $32 a share strikes me as a good long-term bet. As of today September 26, I’m lowering my target price of $55 a share by June 2012 from the current $75 a share by July 2012.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Freeport McMoRan Copper and Gold as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Don’t think that today’s drop in gold and silver is a sign that the market is about to turn

There comes a time in every financial market rout when traders begin selling the stuff that they bought as hedges against falling prices. We hit that point today with gold and silver.

Gold for December delivery closed down $46.20 an ounce, or 2.5%. Silver for December delivery closed down 3.4%.

Why did these safe havens take such a beating on a day when the U.S. stock market indexes managed to finish ahead? The Standard & Poor’s 500 Stock Index was, after all, up 0.7% today.

Margin calls. Read more