CNAV Stocks – Analysis of Gold Companies

Waihi Open Cast Gold Mine by G =]

11 Aug CNAV Stocks – Analysis of Gold Companies

Commodities in general had a bad run for quite a while. Besides crude oil being a watch area, gold has made its way to the news last few weeks with new five-year lows.

Is it time to buy gold?

Gold as an investment is a highly debatable one. There are believers and non-believers holding every strong views of their own. This article is not meant to add to the discussion. While we do not know how to value gold, we can actually turn to the gold mining companies and value them accordingly.

The valuation approach that we will use is the Conservative Net Asset Value or CNAV in short. This is essentially a valuation of the assets that these companies own and highly relevant for gold companies as their main asset should be investments in gold mines and inventories of gold. Both of which are sensitive to gold prices, and hence determines the profitability of the gold companies.

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In CNAV valuation, we often discount assets that are unstable by 50%. Investments and inventories would be taken at half their value. This means that assuming the valuation of gold is at US$1,200 per ounce (based on 31 Dec 2014, as most of the gold companies financial statements were published), we would only take US$600 per ounce into our calculation. This would be a conservative approach and sufficient margin of safety should gold price dips further.

In terms of the selection of gold companies, I took reference from the Wikipedia entry, Largest gold companies. I have excluded Polyus Gold as I could not find a reliable price quote for the stock.

NameExchangeSymbolCNAV per shareStock Price (31 Jul 15)CNAV DiscountPOF ScorePENet Operating cashflowDebt-to-Equity
Eldorado GoldNYSEEGO2.3553.44-46%225++34%
GoldcorpNYSEGG3.28113.28-305%2-5++63%
Kinross GoldNYSEKGC0.41.83-357%2-2++84%
Yamana GoldNYSEAUY0.271.98-633%2-1++86%
Newcrest MiningASXNCM0.74711.14-1392%2-4++78%
Gold FieldsNYSEGFI0.1492.76-1753%2138++90%
Barrick GoldNYSEABX-7.4097.06NA1-3++205%
Newmont MiningNYSENEM-5.61617.16NA117+++115%
AngloGold AshantiNYSEAU-4.0476.12NA1-1+++220%

Out of these 9 companies, only Eldorado Gold seems to be a potential CNAV stock if its stock price goes lower than $2.35. The rest of gold companies have very low CNAV value because of their relatively higher debt levels.

If an industry is undergoing a bear market, some companies may go bust and usually happens to those deeper in debts. Hence, it is prudent to select stocks that have a strong margin of safety and coincidentally they tend to be the ones with less debts. While some companies go belly up, the remaining ones would capture the market share and emerge stronger after they have survived the downturn. But do not expect the industry to recover immediately. You have to be patient to hold the stocks until recovery.

That said, none of the gold companies are worth buying at this point in time based on the CNAV valuation.

Disclaimer: I do not hold any of these stocks and have no intention to invest in them at this point in time. It is also unlikely that I would invest in the future because the investment focus is currently in Singapore and Malaysia equities. Please do not take this as investment advice. The purpose of this article was to show how valuation can be done on gold companies. BigFatPurse.com and myself are not liable for any inaccuracies or error in the data presented above.



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1Comment
  • Edward Gate
    Posted at 16:24h, 18 August Reply

    Interesting.
    Never thought that gold will be this high.
    Hope Common Reporting Standard would
    not be in the way of gold these companies.

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