Top 10 Worst Managed Gold and Silver Companies

In a previous article, I looked at the top ten best managed gold and silver companies—well, here are the bottom ten. Once again, the list was limited to gold and silver stocks that trade on major exchanges (no OTCBBs or Pink Sheets), and each company was graded on the basis of stewardship, financial management, and stock-market performance.

Without further ado, here is the list:

10. Northgate Minerals Corporation (Ticker: NXG)

Canada-based Northgate is a gold and copper miner. With operations in Canada as well as Australia, Northgate is projected to produce upwards of 400,000 ounces of gold in 2009. The stock has a $917.8 million market cap and trades on the American Stock Exchange.

Northgate’s management has been praised over the years by many analysts for making the best of a bad situation. The company’s primary mine is a low-grade property, and the fact that the firm has been able to turn profits for so long says something. However, the numbers don’t lie, and on a quantitative basis, Northgate’s management just isn’t getting the job done.

For instance, Northgate’s sales growth has compounded at an annual rate of just 10% over the past three years, versus a gold and silver company average of 21%. Last year’s earnings came in at $10.7 million, down from $39.4 million in 2007, and $106.7 million in 2006—things are headed in the wrong direction, and someone has to be held accountable.

NXG’s Management Grades
Stewardship: C-, Financial Management: C-, Performance: C

9. Goldcorp, Inc. (Ticker: GG)

Goldcorp has operations in Central and South America, the United States, Mexico, and its native Canada. In 2008, it produced 3.5 million ounces of gold and reported around forty-six million ounces of gold reserves. Goldcorp has a $31.1 billion market cap and trades on the New York Stock Exchange.

Goldcorp got a new CEO in 2009: Charles Jeannes. During his tenure, shares of Goldcorp have gone up by over 73%, which may sound good, but considering gold’s rise in the same time period, it’s actually very mediocre. The average gold and silver company, for instance, has seen its value increase by more than 167%.

It’s also a bit troubling that insiders own less than 1% of Goldcorp’s shares. The interests of management are not clearly aligned with those of shareholders, even if the company does have mostly independent directors and a separate CEO and chairman. Goldcorp’s financial management has been decent, but its stewardship and performance leave a lot to be desired.

GG’s Management Grades
Stewardship: D+, Financial Management: C+, Performance: C-

8. Golden Star Resources, Ltd. (Ticker: GSS)

Golden Star Resources is incorporated in Canada, headquartered in Colorado, and does most of its mining in Ghana, along the Ashanti Gold Belt. The company also has stakes in exploration properties in other African nations, such as French Guiana, Mali, and Suriname. Golden Star’s sub-$5 share price and sub-$1 billion market cap make it attractive to “penny stock” investors, but it trades on the American Stock Exchange (not over-the-counter or the Pink Sheets).

The big strike against Golden Star is its heavy use of debt. While a debt-to-equity ratio of 26% would be far from alarming in most industries, it is quite high for the precious-metals sector. The average gold and silver company has a debt-to-equity ratio of just 9.87%, and most of the best firms use no debt at all. It’s as if gold and silver—which backed our currency before the dollar became a debt instrument—are just incompatible with debt in every way.

It’s also troubling how insiders at Golden Star own less than 1% of their firm’s shares. Although the stock is up 327% over the past year, and management has been able to produce 49% compound annual sales growth for the past three years, the firm has been unprofitable three of the past four years and is projected to post a $90.6 million loss in 2009.

GSS’s Management Grades
Stewardship: D+, Financial Management: D-, Performance: B

7. Barrick Gold Corporation (Ticker: ABX)

Barrick Gold is the world’s largest gold producer. In 2008, it produced more than eight million ounces of gold and reported reserves of fifty million ounces. The company has a market cap of $41.8 billion and trades on the New York Stock Exchange.

Barrick’s hallmark throughout the extended bear market in gold was its hedging against gold. During this time, shares of ABX tended to go up when gold went down, and vice versa. Of course, this worked out well during the early 2000s when gold was in the $200 range. But as gold began its meteoric rise, Barrick’s management was caught unprepared, and thus, the stock has underperformed its peers. Now management has officially begun to “un-hedge,” but that’s more easily said than done, and analysts predict it will be years before Barrick is ever a pure play on gold.

Even though Barrick has begun to un-hedge, its stock performance over the past year has still continued to suffer from residual hedging. Thus, while the average gold and silver company has posted gains of 167%, Barrick is up just 56%. Insiders are basically unaffected by this, though, since they own just 0.25% of the firm’s shares. It’s also important to note that several key managers were poached by rival Gammon Gold (#6 on the best-managed companies list).

ABX’s Management Grades
Stewardship: D, Financial Management: C, Performance: C-

6. MAG Silver Corporation (Ticker: MVG)

MAG Silver is a silver exploration company focused on the Mexican Silver Belt. MAG has mining properties at seven locations and has conducted drilling and testing at each. As of yet, though, MAG has failed to turn a profit. In 2008, MAG posted a net loss of $5.5 million and is projected to lose another $10.6 million in 2009. In total, the firm has lost $18.7 million since 2002 and has yet to take in a single dollar in revenue!

In terms of cash flow, MAG burned through $15.2 million in 2008 and is projected to use another $20.4 million in 2009. As of the last quarter, the firm only has $28.4 million in cash left—down from a high of $61 million at the end of 2007. The majority of MAG’s assets are wrapped up in “other” long-term assets and “intangibles”—it only has $100,000 worth of property, plant, and equipment. The only good news is that MAG only has $1.1 million in short-term liabilities and no long-term debt.

Shares of MVG are up 22.32% over the past year, which is only slightly better than the S&P 500’s average, and far worse than the average gold and silver stock. Insiders own just 1.25% of the firm’s shares. MAG has a $286.5 million market cap and trades on the American Stock Exchange.

MVG’s Management Grades
Stewardship: C-, Financial Management: C, Performance: D-

5. Harmony Gold Mining Company Limited (Ticker: HMY)

Harmony Gold is the fifth-largest gold producer in the world. It has operations in Australia, Papua New Guinea, and South Africa. Last year Harmony produced 2.7 million ounces of gold. The firm’s ore resources are among the world’s largest, too, totaling more than 530 million ounces of mineral resources. Harmony is an un-hedged play on gold. It has a $4.64 billion market cap and trades on the New York Stock Exchange.

Harmony’s board of directors consists of nine members, two of whom are executives. Of the seven non-executive board members, though, only five are independent. Harmony practices voluntary affirmative action in appointing board members, considering race and gender in order to achieve an “acceptable balance.” It is certainly debatable if this has been effective.

Harmony’s management statistics are sub-par across the board. Its three-year sales growth rate is just 5% (versus an average of 21%). Return on equity is an anemic 0.6% (versus an average of 8.69%). Insiders own just 2.54% of the firm’s shares, and Harmony Gold’s stock is up only 33.21% over the past year, versus an average of 167.74%. Harmony also has considerable debt compared to other gold miners.

HMY’s Management Grades
Stewardship: C-, Financial Management: C-, Performance: D-

4. Hecla Mining Company (Ticker: HL)

Hecla Mining produces silver, gold, lead, and zinc. In 2008, Hecla acquired 100% of the Greens Creek from Rio Tinto, effectively doubling its silver production and making it a “silver stock” that also mines gold and other minerals. Hecla has a $1.5 billion market cap and trades on the New York Stock Exchange.

Hecla shares are up more than 170% over the past year, making it easily the best-performing silver stock on this list, but that’s still just slightly above average for gold and silver companies. Hecla’s 6% compound sales growth over the past three years is far below average. Insiders own only 0.44% of Hecla’s shares, and the firm uses nearly twice as much debt as the average among its peers.

From 2007 to 2008, Hecla swung from a $52.2 million profit to an $80.2 million loss. For 2009, Hecla is projected to post a $15.2 million loss. That’s an “improvement,” but hardly one to get excited about.

HL’s Management Grades
Stewardship: D, Financial Management: D, Performance: C-

3. Silver Standard Resources Inc. (Ticker: SSRI)

Silver Standard Resources searches for silver in Australia and North and South America. It holds stakes in many properties, but none of them are currently operating—Silver Standard is waiting for the price of silver to go up first. Silver Standard Resources has never generated a dime of revenue and has racked up losses totaling $43.9 million dating back to 1999.

In addition to generating no sales and no profits, Silver Standard also uses much more debt than the average gold or silver stock, with a debt-to-equity ratio of 27%. The firm has total liabilities of $183 billion and assets of just $145 billion, excluding property, plant, and equipment. Management has burned through $227.9 million in cash over the past two completed years and is projected to go through another $153.7 million in 2009. The firm only has $42.9 million cash on hand as of its most recent quarter, down from a high of $197.3 million at the end of 2006.

Silver Standard has a market cap of $1.54 billion and trades on the Nasdaq General Market.

SSRI’s Management Grades
Stewardship: D+, Financial Management: D-, Performance: D+

2. Agnico-Eagle Mines (Ticker: AEM)

Agnico-Eagle Mines explores for and produces gold in North America and Finland. The firm operates two mines in Quebec and the Finnish Kitilla mine. Other projects are in the works, and Agnico-Eagle has the capacity to produce slightly over one million ounces of gold each year. Agnico-Eagle Mines has a $9.77 billion market cap and trades on the NYSE.

Shares of AEM are up 65% over the past fifty-two weeks. While that would be great during a bearish or even modestly bullish gold market, the fact of the matter is that Agnico’s performance grossly lags that of its competitors. Worse yet, management has led the firm to a -10% three-year compound sales growth rate; undoubtedly one of the main reasons for the stock’s poor performance.

Insider ownership at Agnico-Eagle Mines is 0%. While the difference between a 0.5% ownership rate and a 0% ownership rate might seem insignificant—both are outrageously low—a 0.5% rate shows that at least some of the firm’s insiders have confidence in their own ability to generate a return. A 0% rate means that not even AEM’s own executives and directors—not one of them!—are willing to own shares. Even if they think the stock is headed lower, this is bad management: Part of management’s job is to instill confidence in investors, and at this task, AEM’s leadership has failed miserably.

AEM’s Management Grades
Stewardship: F, Financial Management: D+, Performance: D

1. DRDGold Limited (Ticker: DROOY)

DRDGold is a midsized South African gold mining and exploration company. In addition to three mines in South Africa, DRD also owns the Tolukuma mine in Papua New Guinea. The firm is un-hedged, has a market cap of $198 million, and trades on the Nasdaq Capital Market.

About the only positive thing to say about DRD’s management is that they’re suffering along with their shareholders: Insiders own 10.76% of the firm’s shares, which are up only 8.96% over the past fifty-two weeks. Not only is this a tiny fraction of the gold and silver group’s average, it’s significantly worse than the S&P 500’s average of 21.31%!

Over the past three years, DRD’s management has been able to “grow” sales at a compound rate of -1%. New CEO John Sayers will have to do better in order for the firm to survive. The previous CEO, Mark Wellesley-Wood, was at the helm as DRD’s market cap evaporated—even as gold soared to new highs! The board saw fit to pay Wellesley-Wood $1.5 million for the great service he did destroying shareholder value.

DROOY’s Management Grades
Stewardship: D, Financial Management: F, Performance: F