Eldorado Gold Corp. (EGO) and Yamana Gold (AUY) are high-quality quality miners with lower production costs and strong management teams, providing investors with an entry point to gold equities if the sector sees a decrease in what currently appears to be full valuation, says Joung Park, CFA, Equity Analyst at Morningstar.
“They are not trading at big discounts to our fair values given that Yamana is up almost 30% this year and Eldorado is also up, but not as much as Yamana. But these two are definitely names to keep an eye on if we see another big pullback in gold-mining equities,” Park said. “Our fair value for Yamana is $20 per share, and our fair value is $15 per share for Eldorado.”
Park says there aren’t as many opportunities in the sector given the current valuation levels, and he also says he doesn’t expect much M&A activity given large caps’ newfound capital discipline. In the current environment, Park prefers midtier miners over small caps, which can’t diversify the production base, and large caps, which have a more difficult time finding growth.
“You want a company that’s not too big and not too small. And I think the sweet spot for investors is midtier miners where you have a solid diversified production base, but you still have a lot of room for growth,” Park said. “I think a midtier miner is really at the sweet spot of the corporate life cycle.”
Off the Record: Gold & Precious Metals
December 22, 2008