You portfolio needs this Gold stock
2014 has started with a mild shriek of pain. While markets have not fallen all that much (yet), the volatility has been elevated for most of the developed markets, but that hasn’t necessarily trickled down to Frontier Markets.
While we see that correlations have not been meaningful for equity markets (our post from last week). However, currency moves have been violent in several markets. YTD, the Argentinian Peso is down -16.7%, Botswanan Pula is down -12.6%, the Ghanian Cudi is down -6.5%, and the Nepalese Rupee is down -3.3% all against USD.
These moves are being dictated by short-term flows, Fed policy, and various other factors such as political uncertainty (Turkey), current account deficit concerns (Turkey), economic concerns (Russia).
In this climate, it’s a good time to focus on specific companies that have a great long-term trajectory.
Following up on our post(s) about Peru (here and here). Buenaventura is the largest publicly-traded precious metals company in Peru. It has the largest array of mineral rights in Peru aside from the Government and also has minority stakes in a number of mines with world-class owners (Yanacocha with Newmont, Cerro Verde with Freeport McMoran, and Chucapaca with Goldfields).
For all of 2013, Buenaventura and its affiliates were in rapid cost-cutting mode. Orcopampa is the highest cost Gold mine for Buenaventura and its costs have come down to $649, a -18% decrease from the 2Q of 2013. Ore grades were an issue in lower cost mines such as Tantahuatay, but that was a temporary issue which should be corrected in 2014. Copper production is up over 100%, and the Silver decline in 2013 is again largely due to temporary issues related to ore grade. There is strength in base metals prices (copper and zinc) and silver and gold have formed supports at current levels.
The company is not as efficient as its international peers, but it does provide better value than peers, trading currently at only 5x expected earnings for FY2013, versus an average of 10x globally for similar firms. The firm’s dividend policy has confused shareholders in the past (20% payout on majority-owned operations), but in our opinion the company is attractive, even with the dividend ignored.
The equity is up +4% YTD, but that was after a dreadful 2013, where the equity fell, -69%. The company is trading at about 0.67x its book value and 0.5x if you make a conservative estimate on the potential realized value of several in-progress exploration projects. The equity can be purchased in Peru or the NYSE (BVN). Most investment houses have a bearish view on gold, but if your opinion is neutral or positive, then Buenaventura makes a lot of sense as a way to play the Gold market. In the event of USD strength, you can expect weakness in PEN, reducing cash costs and margins. JP Morgan recently came out with a $19 price target, and we feel comfortable with that valuation which represents a 60%+ upside over the next 12 months. But, absence a significant rally, we feel this company is a great long-term hold.
The company expects gold production to be in-line with 2013 (900,000 ounces). Silver output is expected to increase from 18.8 million ounces to 20 million ounces, and the company should make strong headways in addressing the opposition against the Minas Conga project which it has a minority stake in.
The company’s most recent investor presentation has some great charts, and is well laid out. Check it out here. Their company website is here. By the standard of Latin American companies’ websites, it is stellar.