Add 2 Dirt-Cheap Gold Mining Stocks, See Them Shine

Even though gold started 2014 on a high note, the end is not going to be as kind for the yellow metal. A stronger greenback -- which is currently hovering at its highest level in nearly nine years against a basket of major currencies -- a slump in oil prices and a climb in U.S. equities all have tainted the precious metal's splendor and safe haven appeal and are expected to lead gold toward a bearish end.

In the first half of 2014, concerns surrounding the economy and geopolitical tensions boosted gold's safe haven appeal and led to strengthening of prices. In fact, in mid-March, gold attained a six-month high of $1,379 per ounce, stoked by Ukraine worries, fears of a slowdown in China and weak U.S. economic data that drove investors to take refuge in bullion.

Until August, gold prices held their own, remaining on either side of $1,300, dipping at times on positive U.S. economic indicators. However, the bubble soon burst as a stronger US dollar led to weakening of gold prices. Further, gold has been let down by weak demand in its otherwise biggest markets – China and India. Starting September, prices remained steadfastly under the $1300 range and showed a clear downward trend due to a stronger dollar.

Gold resumed its downhill journey in October on a positive jobs report and dour economic reports from the European Union, particularly its leading economy Germany. However, gold found some support in the latter part of October from strong physical buying in India, thanks to the festive and wedding season.
 
Nevertheless, the tables soon turned in November for gold prices, which fell below the psychological level of $1,200, triggered by the Federal Reserve's announcement that it would end its QE3 bond buying program, coupled with surge in equities, further fall in crude oil price and new stimulus measures by the Bank of Japan. On Nov 6, gold fell to four-and-half-year lows to $1,143 per ounce, on the back of a strong U.S. dollar and a steady climb in the equity market that kept investors away from the safe-haven gold market.

Moreover, an unsuccessful Swiss referendum, which ruled out the suggestion of boosting gold reserves, was the final nail in the coffin for gold. A vote in favor would have meant the bank will have to buy a considerable amount of gold to increase reserves by around 1,500 tons over a period of five years or 300 tons per year, roughly 8% of annual gold demand. This would have had an immediate impact on gold prices.

Ending the Year on a Bearish Note

Gold took a downturn on Dec 17 and has been below $1,200 ever since, following the Fed’s decision to remain on track to raise interest rates in 2015, curbing the appeal of gold as a store of value. Benchmarks gained for the fourth straight session as investors continued to cheer Federal Reserve's decision.

The S&P 500 closed at a record level for the 50th time in 2014, its highest number of record closings in a year since 1995. The Dow posted a record close for the 35th time this year. Moreover, low oil prices and a stronger dollar has kept gold prices in check.

Overall, it has been another harrowing year for gold, always on the verge of replicating the nightmarish 2013. Hence, gold mining stocks have taken a beating this year, delivering negative year-to-date returns, due to turbulent gold prices and disappointing earnings results and negative earnings surprise this season.

This Year's Losers, Winners in 2015

Below we highlight two gold-mining stocks which have lost more than 50% of their value year to date. However, backed by a favorable Zacks Rank and upward estimate revision, we believe these stocks have the potential to turn around and it is a good idea to add them to one’s portfolio. Moreover, these stocks are dirt-cheap today.

Banro Corporation (BAA - Snapshot Report)

Based in Toronto, Canada, Banro is engaged in the exploration, development and mining of gold properties. The company holds a 100% interest in 4 gold properties, including Twangiza, Namoya, Lugushwa and Kamituga comprising 13 exploitation permits encompassing an area of approximately 2,612 square kilometers in the South Kivu and Maniema provinces of the Democratic Republic of the Congo.

Banro Corp currently carries a Zacks Rank #2 (Buy). The stock has lost 76.6% of its value year to date. Shares of Banro hit a 52-week low of 12 cents on Dec 23.

However, the Zacks Consensus estimate for fiscal 2015 has moved up with one positive revision over the last 60 days. Banro is currently trading at a P/E (ttm) of 6.5x, much lower than the peer group average of 25.04x.

Allied Nevada Gold Corp. (ANV - Snapshot Report)

Reno, Nevada-based Allied Nevada is engaged in the mining, development and exploration of gold and silver in Nevada. It operates the Hycroft Mine, an open pit heap leach operation located to the west of Winnemucca, Nevada. It also owns Maverick Springs, Mountain View, Wildcat and Pony Creek/Elliot Dome. In addition, it has approximately 73 other exploration properties.

Allied Nevada sports a Zacks Rank #2. Shares of Allied Nevada have lost 74.1% of their value year to date. Shares of Allied Nevada hit a 52-week low of 72 cents on Dec 15. Allied Nevada is currently trading at a P/E (ttm) of 5.0x, much lower than the peer group average of 50.57.

The Zacks Consensus Estimate for the company has moved north with 2 positive revisions in the last 60 days for fiscal 2015. Analysts polled by Zacks currently expect the company to deliver a loss per share of 33 cents, an improvement from the prior estimate of a loss of 35 cents per share.

What’s in Store for Gold and These Stocks in 2015?

Even though looming Federal Reserve interest rate increases in the second half of 2015 and a stronger U.S. dollar will keep on pressuring gold prices through the year, prices will get support from retail demand for gold, particularly in India and China. Prices will firm up in the latter part of the year as the fourth quarter is a seasonally strong period for gold as demand remains strong with the Diwali festival in India, and Thanksgiving, Hanukkah, Christmas and New Year's in the U.S.

Moreover, On Nov 28, India eased gold import norms by withdrawing the 80:20 rule in gold, imposed in Aug 2013. The directive was to re-export one-fifth (20%) of all the precious metal imported. As India replaced China as the world’s top gold consumer in the third quarter, this will support gold prices. Lower prices, a new government and better prospects for economic growth provides an encouraging backdrop for gold demand in India.

These current underperformers will eventually benefit from the recovery of prices next year. It seems prudent to add these stocks at the current depressed levels and to benefit next year.

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