New Gold's Growth; Newmont's Dividend

New Gold's stock price has leaped as its gold production has grown. Click below for graphic.

"What's gold going to do?" It's a question almost every investor has to grapple with these days. But in 2012, some pros say, investors should focus not on the metal itself, but on the firms that dig it out of the ground. Traditionally, when the price of gold rises, gold mining stocks rise faster. A miner's costs are mostly fixed, so if the metal's price goes up, nearly all of those extra dollars go right to a miner's bottom line. But over the past year, as gold's price has jumped 25 percent, gold mining stocks, as a group, are down 1 percent. It's the reason why some veteran gold investors are convinced that as long as gold doesn't tank, the mining stocks should excel. "Financially, they've never been in better shape," says Joe Foster, a portfolio manager at investment firm Van Eck Global, which owns both the stocks described below.

P/E: 11
Estimated 2012 Earnings: $3.3 Bil.

Gold miners have long been criticized for paying paltry dividends and instead plowing their profits into acquiring and developing new mines. Some investors have voted with their feet, taking money out of the miners and moving it to exchange-traded funds. So Denver-based Newmont (NEM: 59.54, -1.83, -2.98%), the world's second largest miner by production, recently took action: In April, the firm announced it would link its dividend to gold prices. Newmont has doubled its dividend since then, and it says it will keep paying out higher amounts as long as gold stays above $1,500 an ounce.

For some investors, that dividend doesn't make up for the fact that Newmont's giant Boddington, Australia, mine has been dogged by cost overruns and lower-than-expected grades of ore. (The company says the mine remains one of its "cornerstone assets.") Although the company has other promising projects -- such as Akyem, in Ghana, and Conga, in Peru -- analysts don't expect these to significantly boost its production numbers until 2015, at the earliest. Still, Newmont is estimated to be sitting on 94 million ounces of gold -- $42 billion worth after extraction costs, according to investment bank Stifel Nicolaus -- while the company's market value is just $34.1 billion. Analysts say that means its shares are comparatively cheap: While it's not unusual for gold miners to be trading at less than the value of the gold they own, that's one of the highest discounts seen in years, says George Topping, a mining analyst at Stifel Nicolaus.

P/E: 17
Estimated 2012 Earnings: $324 Mil.

Big miners, like many larger companies, have a tough time growing sales and profits significantly over the long haul. Small miners, however, don't have this problem, as any new mine they start can have a big impact. Vancouver-based New Gold has one advantage over other small rivals, analysts say -- its management team includes two well-known gold industry hands: executive chairman Randall Oliphant, who previously ran Barrick Gold, the largest gold company, and director Pierre Lassonde, previously president of Newmont. Both have also invested a significant amount in New Gold stock, according to regulatory filings. New Gold produced 383,000 ounces of gold in 2010 and expects to reach nearly half a million ounces by 2013, as it develops two of its most promising projects -- the Blackwater mine, in Canada, and the El Morro mine, in Chile. It's also cutting its production costs, from $400 an ounce in 2011 to an estimated $230 an ounce in 2012. Analysts expect profits to jump 66 percent, to $324 million, in 2012.

New Gold (NGD: 9.71, -0.16, -1.62%) stock rose 67 percent in the 12 months ended October 2011, but it still has plenty of room to grow, says T. Rowe Price analyst Rick de los Reyes. Once small miners prove themselves in terms of growing production and bringing down costs, they tend to be "revalued at a higher level," he says. "It's something gold investors latch onto."