This is G&G Investment Society (GGIS) e-newsletter GGIS Portfolio Update Mar 2012 Wal-Marts Raising Its Dividend & China s Gold Binge Akwaaba (Welcome) GGIS Subscribers, On March 1, you probably missed one of the most important pieces of investment news so far this year. This was just before the market began its three-day, 2.2% "hiccup." And most traders were so worried about seeing their volatile, low-quality stocks sink in price, they didn't even notice how a small group of investors received a 9% raise. While the "herd" was in a lather, this group was sleeping well at night knowing its income was about to take another big step higher just like it's done every year for 38 years. Wal-Mart announced it's raising its dividend 9% this year, to $1.59 per share. The dividend is payable in four quarterly installments of $0.3975 each... Investors will receive their first adjusted dividend in April. This group is known as "owners of Wal-Mart common stock." The news was Wal-Mart's latest dividend increase, which will push the annual payout up from $1.46 per share to $1.59 a 9% jump. Keep in mind, that's on top of the 21% increase from the year before and the 11% increase the year before that and so on. Wal-Mart has raised its dividend every year for the past 38 years. Over the past five years, Wal-Mart hasn't paid out less than 30% of its earnings in dividends. So it could double the current dividend and still have more room to grow it. Excellent dividend growth history coupled with excellent near-term and long-term dividend growth potential makes Wal-Mart the ideal World Dominating Dividend Grower (WDDG).
Wal-Mart is currently trading above our buy price of $56 a share. But be patient... Paying too much per share will lower your return and raise your risk. To keep risk lower and returns higher, don't buy the stock until it drops back into range... Over the last six months, Wal-Mart's shares are up 27%. This says some people are starting to acknowledge the importance of Wal-Mart's excellent near-term and long-term dividend growth potential. But the "hop-hum" reaction to Wal-Mart's recent announcement tells me the crowd hasn't woken up to this idea yet. You can "wake up" right now, though. If you're done fretting whenever the market takes a hit if you want to sleep well at night no matter what the market does if you want to see your income rise every year relentless dividend-raisers like Wal-Mart are the kind of stocks you need to own. BUY Wal-Mart (NYSE: WMT) up to $56 a share. ------------------------------------------------------------- Internal Sponsorship: Since you are already a GGIS Subscriber, you ll still be eligible to receive the 50% discount on Tax Preparation services for life if you sign up for a Lifetime subscription before April 17, 2012. To become a G&G Investment Society Lifetime Subscriber for the $399 price, send an e-mail to GGIS@gngassoc.com and we ll send you instructions on how to make your payment. DON'T WAIT ANOTHER DAY! - Lifetime subscription - $399 (April 18 th $699) *** Membership Guarantee... If you don't make your money back from being a GGIS member by the end of your subscription...we'll refund 100% of your subscription fee back. That's how confident we are that this will be one of the best financial moves of your life. So, Sign up today!!! ------------------------------------------------ China's Gold Binge Gains Steam We're Taking Advantage Through This Low-Cost Producer Last month, China's "Fort Knox" got several million ounces bigger... On February 24, Venezuela announced Citic the Chinese state investment company would help develop Las Cristinas, the largest undeveloped gold deposit in South America and a classic "trophy" asset.
Las Cristinas contains at least 16.9 million ounces of gold. (And that calculation is based on a $550 per ounce gold price... At today's $1,700 an ounce price, its reserves should be much greater.) And it will be a simple, giant open-pit mine. The capital cost will be just $356 million. So once the trucks start hauling off its ore, Las Cristinas will be wildly profitable... It's exactly the kind of gold deposit China wants to bolster its gold holdings. The deposit used to belong to a Canadian mining company, Crystallex. With the prized Las Cristinas at the center of its portfolio of assets in 2007, the $1.2 billion company looked like a company on the rise... But then Venezuela's strongman president, Hugo Chavez, decided he had other plans for the resource. Suddenly, Crystallex's environmental permit application had mysterious problems. The government blocked the development of Las Cristinas and dragged the process out over years. Finally, in February 2011, the Venezuelan government canceled Crystallex's contract. Chavez literally confiscated the gold deposit without explanation. Crystallex's market value fell to $23 million. It shut its doors for good, delisting from the Toronto Stock Exchange before the year ended. And look who Chavez brought in to develop the project...chavez and the Chinese go way back. China lent Venezuela more than $30 billion in 2007 to develop oil projects. And it became officially involved in Las Cristinas in June 2010, when Crystallex announced a deal with China Railway Resources Group to "help" the company develop the project. You see... over the last 30 years, China's overwhelming success selling its exports to the world has resulted in a massive foreign currency reserve, equal to about $3.2 trillion. Roughly half of that is in U.S. government bonds, but the United States' policy of printing endless new dollars to pay off its mountainous debts has created a problem for China. If China hangs on to those bonds, it could see their value "inflated away." But if it tries to dump those bonds, it would flood the market. And the value of its bonds would collapse. So instead, China is trying to secure the value of its reserves against inflation by buying gold. The country has official gold reserves of 33.9 million ounces. But it plans to get more. Part of China's strategy is to comb the globe for world-class gold deposits it can buy for cheap. This happened in November 2011, when the government-owned Chinese gold company Shandong Gold Group bought gold company Jaguar Mining for $1 billion. And we are seeing it again with Las Cristinas. China's concerted effort to acquire valuable gold properties around the world will increase the value of many mining companies whether or not they are targeted directly by the Chinese. To take advantage of the trend, we want to own world-class, trophy gold deposits now. Several months ago I recommended Keegan Resources (AMEX: KGN) to play this trend. In this month's issue, I'm going to highlight another stock, already in the GGIS portfolio, positioned to benefit from China's gold binge.
The Cheapest Major Gold Producer Kinross Gold (NYSE: KGC) is the sixth-largest gold producer in the world by production volume. I first featured Kinross in the GGIS portfolio back in March of 2007. And as I said then, Kinross is too cheap for a major gold producer: Investors punished Kinross shares for the company's September 2010 acquisition of fellow junior miner Red Back Mining. The deal cost $7.8 billion. However, the main asset, the Tasiast gold mine in the African nation Mauritania has been beset with engineering problems surrounding how Kinross will extract the gold from the ore (milling in industry parlance)... The result is that Kinross says production will be delayed nine months from its original goal. And even that may be optimistic. The share price fell from about $20 immediately after the takeover to a recent low of $10 per share. Kinross shares fell 21% on January 17 when the company informed its shareholders that it wrote off $2.9 billion. The charge was against the value of its Tasiast gold mine. What Kinross wrote down is classified as goodwill. It's the difference between today's value of the mine and what the company paid. Simply put, Kinross paid far too much for Red Back Mining. The company made a tough decision (but the right one) in January to revalue the mine. The choice hurt the company's 2011 performance and Kinross' reputation with investors, who dumped the company's shares. However, Kinross can now get back to business. That's our opportunity. You see, Kinross' business has not changed. Its shares will recover. It grew production by 13% to 2.6 million ounces in 2011. Its growth curves since 2005 are fantastic. It grew reserves from 24.7 million ounces to 62.6 million ounces over that period. That's a 153% increase. And it will continue to grow in 2012. In the table below, we can see how its business compares to its peers. Company Market Cap Gold Reserves 2011 Production Barrick Gold $48.6 billion 140,000,000 7.7 million Goldcorp $39.8 billion 64,700,000 2.5 million Newmont Mining $30.5 billion 98,750,000 5.2 million Yamana Gold $13.2 billion 17,038,000 2.6 million Kinross Gold $12.7 billion 62,568,000 1.1 million Agnico Eagle $6.3 billion 19,047,000 1.0 million IAMGOLD $5.8 billion 21,299,000 1.0 million As you can see, Kinross ranks fourth in reserves and fifth in production in this group. However, these data points are cursory comparisons for gold companies. To get its real value, we need to compare the price investors pay for shares with its operations.
To find that value, we'll use a simple comparison. First, take the company's enterprise value (or "EV"). (To calculate EV, take the market value, debt, and subtract cash.) Then divide it by production and reserves. Company EV to Reserves EV to Production Kinross Gold $203 $4,857 IAMGOLD $300 $5,055 Agnico Eagle $318 $6,860 Newmont Mining $363 $6,905 Barrick Gold $440 $8,025 Goldcorp $606 $15,598 Yamana Gold $771 $11,921 Average $429 $8,460 Kinross is the cheapest company on an EV-to-reserves basis and an EV-to-production basis. That reflects the market's selloff after Kinross wrote down Tasiast. Also, unlike many of its peers, Kinross doesn't benefit from sales of metals other than gold. Kinross makes much less per ounce of gold sold than its peers. That's not because of anything Kinross is doing wrong. It's because most of the other mining companies are selling more than just gold. They produce several pounds of copper and/or silver for every ounce of gold they produce. That pads revenues. Company Revenue per Oz. Production Earnings per Oz. Production Kinross Gold $1,511 $756 IAMGOLD $1,740 $808 Agnico Eagle $1,845 $809 Barrick Gold $1,865 $1,085 Yamana Gold $1,972 $1,153 Newmont Mining $1,998 $996 Goldcorp $2,132 $1,205 Average: $1,866 $793 So when we just compare gold ounces to revenue, it appears that they are getting premium values for their gold. For example, Goldcorp appeared to receive $2,132 per ounce of production. That's because 27% of its revenue comes from metals other than gold. However, most of the companies choose to use the extra income to reduce the cost of production. Without that extra metal, companies like Newmont and Agnico Eagle would have difficulty staying profitable at all.
The Lowest-Cost Producers Are the Best Investments One lesson we've learned over the years is that the low-cost producers are best. They make the most money as the price of resources goes up. They also survive the longest (and emerge the strongest) when resource markets fall. That's another reason why I like Kinross. Let me explain further We can do some simple math to figure out the company's costs. Let's subtract earnings from revenue and then divide it by the volume of the gold production. That way, we can figure out exactly how much it costs for a company to produce an ounce of gold. The results show that Kinross is the lowest-cost gold producer among its peer group. Company Cost Per Oz. of Gold Production Kinross Gold $755 Barrick Gold $780 Yamana Gold $818 Goldcorp $927 IAMGOLD $932 Newmont Mining $1,002 Agnico Eagle $1,036 Average $893 Kinross' cost of gold production is just $755 per ounce. That's 25% lower than Newmont's, 19% lower than Goldcorp's, and 27% below Agnico Eagle's. While it doesn't make as much revenue from selling other metals, this shows that it's a well-run company. That's critical because low-cost producers are the best businesses to own in resources. That includes everything from mining to oil and gas. The low-cost businesses are the ones left standing when everything collapses. And Kinross is one of those companies. Kinross Offers Us 42%-85% Upside in 2012 However, that's just looking at these companies as gold producers. Let's forget about that for now and just evaluate the businesses. One of the best ways to compare regular businesses whether it makes pool toys, t-shirts, or bars of gold is the price-to-earnings (P/E) ratio. The P/E ratio is simply the market cap of the company relative to its annual earnings. It shows us the premium over the company's earnings that an investor today will pay. If we take an average of Wall Street's estimates of Kinross' 2012 earnings, we again see Kinross is cheap compared to its peers. In the following table, I'm using EV instead of the
conventional market cap. As I explained, EV factors in debt and cash, so it gives us a more precise gauge of value. Company EV-to-2011 Earnings EV-to-2012 Earnings IAMGOLD 6.3 4.4 Kinross Gold 6.4 4.6 Newmont Mining 6.9 5.6 Barrick Gold 7.4 5.5 Agnico Eagle 8.5 7.3 Yamana Gold 10.3 6.7 Goldcorp 12.9 8.0 Average 8.4 6.0 The industry average P/E ratio (using 2011 earnings) is 8.9 times. Kinross is well below the average and it's the cheapest valuation in the group. Using 2012 earnings estimates, we see that the P/E falls even further. Kinross trades for just 4.6 times Bloomberg's estimated 2012 earnings. It's again the lowest in the group... and well below the average of 6.1 times earnings. According to Bloomberg, Kinross' earnings should grow 41% this year. If nothing changes, and Kinross continues to trade for 6.4 times earnings, we should make 41% based on that growth alone. However, there is a best-case scenario here. The market will forgive Kinross for its blunder at Tasiast eventually. If this happens, it should trade up closer to the group average of 8.4 times earnings. If that happens, and Kinross grows its earnings the way I expect, it could make 85% on our shares this year. Based on this analysis, I'm continuing my buy recommendation on Kinross Gold. Action to take: Buy Kinross Gold (NYSE: KGC) up to $13 per share and use a 33% trailing stop. DROPBOX Registration As the GGIS portfolio continues to grow in membership, many people want access to archived newsletters. To better serve our subscribers, I signed up to a great tool that allows you access to a GGIS folder on your desktop computer 24/7. If you didn t register for DropBox yet or didn t receive the invite yet, just send an e-mail to ggis@gngassoc.com and request an invite again. Once you receive the DropBox email, accept the invitation, register & download the software to your computer and you ll have
access from there. The service is free to you and it s a great tool to allow us to exchange files and give you 24 hour access to GGIS data. GGIS Educational Tip: If you want to learn more about price earning ratios and how to figure them out for yourself, go to: http://www.investopedia.com/terms/p/price-earningsratio.asp#axzz1ouip71xm All good investment analysts look at this measure before making investment decisions. It is the staple of being a good investor. Remember If you want to increase your knowledge, you have to do those things that will increase it. As always the more you learn, the more you earn. The less you know the more you owe. Please click on the link for March s Portfolio update: http://www.gngassoc.com/portfolio/mar12.pdf If you are a GGIS Subscriber and haven t taken advantage of your free one hour ($200 value) consultation, call this week and setup an appointment to make sure your money is working hard for you instead you working hard for the money. As usual if you need a one-on-one consultation to learn how to implement these investments or any others on the GGIS portfolio to best fit your financial goals, feel free to contact me to setup an appointment as well. Good Investing! Ankh Uja Snb (Life, Health & Strength) Asar Maa Ra Gray Tax & Financial Consultant, RFC G&G Associates 757-251-3757 office 866-361-3872 toll free fax www.gngassociates.net Become a Fan of G&G Associates and G&G Travel on Facebook. Investing is much like gambling. But, the difference is that with knowledge in investing you can at least increase your odds of winning. J. Carter P.S. If you are looking to Travel and looking for steep discounted travel, visit www.gngassociates.net, click on the G&G Travel link and let your travel planning begin. Let us know where you want to go and we ll do our best to find you the best deal your money can buy. Become a Fan of G&G Travel on facebook.
LEGAL NOTICE: This work is based on what I ve learned as a financial researcher and analyst based SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. It may contain errors and you should not base investment decisions solely on what you read here. It s your money and your responsibility. Nothing herein should be considered personalized investment advice.