With gold prices high and likely to go higher, this might be the best time to invest in gold mining stocks.
Gold prices eked out a small gain Friday to close at $1,616.30 an ounce.
Comments from German Chancellor Angela Merkel Thursday supporting European Central Bank President Mario Draghi's crisis strategy to do "whatever it takes" to save the euro helped push gold prices higher.
More disappointing U.S. economic news in manufacturing and housing starts could also boost the yellow metal. The more the U.S. economy struggles, the more likely the U.S. Federal Reserve will launch another stimulus program that would favor higher gold prices.
For some investors, this adds to their dilemma of whether to invest in physical gold or gold equities.
History is on the side of physical gold. Citigroup Inc. (NYSE: C) has found that in the last five years, physical gold has outperformed global gold stocks by 120%.
But because gold stocks – and gold mining stocks in particular – have lagged gold prices, they have a lot of upside potential.
What's more, gold mining stocks offer something in return – dividends – in addition to benefiting from a continued rise in gold prices. Many commodities experts think gold prices could reach $2,000 an ounce or more within the next six months.
While not quite in bull mode, gold mining stocks have begun to stir of late. Here are three gold mining stocks worth a look for gold equity investors.
Investing in Gold Mining Stocks
Newmont Mining Corp. (NYSE: NEM)
Recently Newmont Mining scaled back on its expansion plans but it did announce last year a plan to link dividend payouts to the gold prices.
Questions recently arose about this dividend policy, which has resulted in a startling payout ratio of 293%. That means NEM is paying out in dividends almost three times what it earns in profits.
But Newmont CEO Richard O'Brien defended the policy, saying the company's dividend was sustainable. He believes it also exemplifies Newmont's commitment to give its shareholders cash amid increasing mining costs.
O'Brien said in the July conference call that the dividend policy helps enforce discipline in the company's "capital spending and other spending requirements to ensure that we can keep the balance" of growth plans while returning money to investors.
In the first half of this year, Newmont Mining paid $350 million in dividends, an 84% increase from the previous year.
In recent quarters the company has also seen solid revenue growth thanks to the decade-long rise in gold.
Year-to-date, Newmont's shares are down about 20%, but they're up 5.74% over the last month. Wall Street's one-year target for NEM is $60.59, a 28% increase from Friday's close of $47.16.
Agnico-Eagle Mines Limited (NYSE: AEM)
In its second-quarter earnings report, Agnico-Eagle Mines reported better production from its Meadowbank mine. The company subsequently increased its full-year outlook to 975,000 ounces of gold, up from a previous estimate of 875,000 to 950,000 ounces.
CIBC World Markets analysts subsequently increased their AEM price target from $42 to $50 based on expectations the company will continue delivering on production and that the average price of gold will increase to $2,000 per ounce.
For the year, Agnico's shares are up 29%, trading at about $47. In the past month, Agnico-Eagle has risen 25%.
Yamana Gold Inc. (NYSE: AUY)
Similar to many of its gold-mining peers, this Canadian company reported a second-quarter profit decline of 78%, attributed to lower metal prices and declining copper concentrate sales.
But in the last two years, AUY has enjoyed expanding revenue and predominately greater earnings while gold and silver prices have risen.
Compared to its peers, Yamana thinks small regarding production — and the strategy seems to be working.
Take a look at its stock.
In the last 19 months, AUY has actually outperformed gold prices. Yamana stock is up 14% in that period, compared to a 10% increase in gold prices.
In the last three months alone the stock has increased almost 13%. Its one-year price target is $20.51, a 33% increase from Friday's close of $15.43.
Investing in gold mining stocks is not only cheaper than buying physical gold, it's a great way to ride the increase in gold prices while getting paid a dividend along the way.
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