With Canada’s economy stalling and the possibility the country may soon enter another recession, it is only natural for investors to seek out a safe haven for their hard-earned capital. Typically, gold is one of the favourite investments, as it is acyclical and acts as a great place to store capital during times of fear and panic.
Gold also protects investors from inflation, which is a risk during financial crises when federal governments are printing money to stimulate the economy. Gold-mining stocks are always risky investments, although the payoffs are higher when the price of gold goes up, there is no guarantee an investment will pay off. Even if the price of gold does move favourably.
Investors take on a variety of different risks owning gold stocks and need to be aware before making any investment decisions. Three gold stocks, each with its own story, are Iamgold (TSX:IMG)(NYSE:IAG), Yamana Gold (TSX:YRI)(NYSE:AUY), and Eldorado Gold (TSX:ELD)(NYSE:EGO).
Iamgold has a lot of qualities long-term investors want to see out of a gold company. It has managed cash flow well, cutting the dividend and operating costs. The bulk of Iamgold’s production comes from three mines: one in Suriname, one in Burkina Faso, as well as the Westwood mine in Quebec. With 90% of Iamgold’s production coming from these mines, execution there is paramount.
Going forward, in order for Iamgold to increase its profitability, it needs to increase its margins. Management knows this and has been working diligently to decrease the operating costs of the mines. If management can succeed, the stock looks very undervalued at today’s prices, however; management must achieve the goals they’ve set.
It is also promising to see the new growth projects Iamgold has in the pipelines. Currently, these projects are being deferred to a better gold environment, which could end up being soon. As promising as the company looks though, the degree of execution risk the investor is taking on is high, therefore any investment should remain only a small percentage of one’s portfolio.
Yamana is more of a turnaround story. Recent sales and divestments in the last two years have given the company some financial flexibility and refocused efforts to the main mines. Decent production costs out of these main mines, which make up most of the revenues, should help produce better margins going forward.
The new Cerro Moro mine is also very important to the growth of the company due to its long-term potential. The mine has the ability to produce upwards of 125,000 ounces of gold annually. This looks promising, as long as management is able to execute to get the mine up to its potential.
Yamana also recently sold its Chapada mine, which has helped with cash flow relief but exacerbates the need to execute on existing mines. The strategy of the company to decrease net debt-to-EBITDA is on track, and this year it is looking to get it down from 1.5 times to one times. Management’s ability to deliver on their goals is key, as investors wait to see more good news to confirm the turnaround.
Eldorado has a lot of problems that need to be resolved before it is worth investing. It sold a bunch of assets to get production concentrated to few mines, however; this has backfired slightly as legal problems with the Greek government have been causing delays.
In addition to the delays being caused by the issues with the Greek government, the problem has also tied up capital. This has caused a cash flow issue, which will most likely need to be made up by additional financing. A serious turnaround is needed before investors should consider an investment.
The bottom line
Gold can be an important part of an investor’s portfolio. Since gold companies tend to be more volatile, it is important for investors to diversify within the gold sector. Investors should buy gold-backed ETFs as well as gold stocks to mitigate the many risks that come with gold miners.
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Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.