It’s Time To Watch Gold Mining Stocks

February 1, 2018

It’s Time To Watch Gold Mining Stocks

  • I will discuss gold miners to give you an overview of what you can expect when investing in them.
  • As I’ll cover all the holdings of the biggest gold ETF, the Van Eck Gold Miners ETF (GDX), you will also get a good idea about the ETF. This article is part one of the top 10 holdings we’ll discuss.
  • Perhaps it’s too early, but it might actually be the best time to hedge your portfolio with gold miners.


Introduction

I’ve already described why it’s important to own gold miners in your portfolio. No one knows if gold will hit $5,000 or $500 in the next 5 years, but if you can invest in a way where you can’t lose much but you can also win big, it’s definitely a thing to look at.

It’s better to invest in gold miners because they are more leveraged to the price of gold and thus offer you less downside and a higher upside. The potential downside is all of what you invest, but the upside might be 10 or even 20 times your initial investment. However, all gold miners are different and you have to figure out which ones best fit your portfolio.

The Van Eck Gold Miners ETF (GDX) has 50 holdings, but the weight goes from 9.27% for Newmont to 0.39% for Guyana. As every miner is different, there really is a bit of everything in this ETF which doesn’t necessarily mean you are well diversified because the top 10 biggest miners have a 54% weight and bigger doesn’t necessarily mean better in this case.

Table 1: GDX ETF holdings and weight of the largest 10 miners. Source: Van Eck.

I’ll discuss each miner so that you can see what best fits your portfolio risk reward appetite.

High mining costs and high debt levels give you much more leverage to gold prices while low production costs and no debt given you stability. Further, the amount of reserves counts as the higher the reserves are, the more long-term oriented the miner is and they will have lower acquisition costs to replace current production and mine depletion. Another difference comes from current or future expected production. In mining, there are huge risks in developing a mine and therefore, there is also a bigger discount for such a miner. Don’t forget political risk, which can be high even in Canada due to environmental reasons. Enjoy the read, and I’ll bet you will find the best hedges for your portfolio in relation to mining costs, indebtedness, political risk, and jurisdiction.

The source of all the data mentioned below is from the respective company investor relation page.

This article is part one of two, and today I will discuss the first 10 holdings.

Newmont Mining Corp (NYSE: NEM)

The first thing to look at with a gold miner are mining costs, and NEM has all-in sustaining costs that are around $900 per gold ounce. As gold prices are above $1,300, it’s a healthy margin but it also indicates that the company would be in trouble if gold prices fall close to that level. Mining costs are expected to be in around $900 for the next 10 years.

Figure 1: NEM’s mining costs. Source: NEM.

Operations are mostly focused in North America and Australia with a bit of mining in South America and Africa.

Figure 2: NEM’s geography. Source: NEM.



What is important to know is that NEM won’t be able to increase its production as its mines become depleted and new projects aren’t big enough. However, NEM offers stability with relatively low costs.

Figure 3: NEM’s expected future production. Source: NEM.

The company has 12 years of operating reserves with an average grade of 1.2 grams per ton.

As gold prices have increased and NEM has lowered its mining costs, it has also managed to lower its net debt which lowers the risk of investing in such a company.

Figure 4: Net debt. Source: NEM.

A change of $100 in the price of gold would add $360 million to NEM’s free cash flow. As gold prices are higher now, NEM expects to raise its dividend in 2018 by at least 50%. However, this would still keep the dividend yield below 1%.

What you can expect from NEM is stability, a small yield, and some leverage to gold prices. With 534 million shares, a $100 gold price increase increases the cash flow yield by 67 cents but would still keep the price to earnings ratio high and close to 40. The free cash flow yield would however be around 5% to 7% which is a good return in this environment. If gold prices double, NEM’s stock price would do as well as it has in the last 3 years when gold prices have gone from the almost $1,000 low to the current $1,300 with NEM’s stock price increasing 70%.

Figure 5: NEM’s stock price. Source: CNN Money.

You can expect stability from NEM and risk only in the case that gold prices fall below $1,100, which is always a possibility.

Barrick Gold (NYSE: ABX)

ABX has typically been seen as the gold miner with the largest market capitalization, but it hasn’t performed as well as NEM lately.

Figure 6: ABX’s stock price in the last 3 years. Source: CNN Money.



ABX is similar to NEM but it has a longer mine life, 16 years compared to 12, a higher gold grade of 1.84 grams per ton, but it has also a higher debt level which is also declining. However, the maturity of its debt is post 2032.

Figure 7: ABX’s debt maturity is long term. Source: ABX.

A long term debt maturity eliminates refinancing issues which is always a good thing with cyclical investments like mining.

ABX’s guided production is also slowly declining which leads people to believe it will hunt for acquisitions again and perhaps destroy value as has been the case in the last 10 years.

Figure 8: ABX’s expected growth. Source: ABX.

ABX’s stock price hasn’t performed that well lately because there have been some issues with their Veladero mine due to a leach incident and their subsidiary in Tanzania has seen its production suspended. Nevertheless, at current gold prices, I wouldn’t be surprised to see ABX have a 10% free cash flow yield which is higher than NEM’s and therefore makes ABX more attractive. Further, by owning ABX, you own the company with the largest global gold reserves which is an interesting long term hedge.

Figure 9: ABX’s reserves. Source: ABX.

Franco Nevada Corporation (NYSE: FNV)

The difference between FNV and the above two companies is that FNV is a royalty streamer. They invest in projects and expect a cut on the production for as long as the project is operating. Such a modus operandi allows FNV to be extremely cash flow positive, have no debt, and pay a dividend. However, with the stability and limited risk—the company practically can’t go bankrupt unlike other miners—FNV is pricy with a price to cash flow ratio of 27.

As I see investing in gold miners as a hedge to whatever happens with our currencies, I prefer to be more leveraged to gold price investments and expensive royalty companies don’t really fit the bill.

Figure 10: FNV’s guidance. Source: FNV.

Newcrest Mining (OTC: NCMGY)

NCM is an Australian miner that has an extremely long reserve life.

Figure 11: NCM’s reserve life. Source: NCM.



The price to free cash flow is 8.5% and is about to increase as NCM has had some issues due to a seismic event at its flagship mine in 2017, so we can expect better results in 2018 especially given the higher gold prices. All-in sustaining mining costs are below $800, so that is a great margin of safety in relation to gold prices. Given the largeness of its mines, NCM has the potential to grow further in the future which isn’t the case with ABX and NEM.

They expect to increase production from their top two mines and perhaps develop the 50% owned Golpu project in Indonesia.

Figure 12: NCM’s growth pipeline. Source: NCM.

Also, Newcrest owns 14.5% of the Solgold project in Equador which owns the potential Tier 1 Cascabel operation with extremely high copper and gold intersections.

Figure 13: Cascabel compared to other mines. Source: Solgold.

As you can see, NCM comes out often in the above table. Perhaps NCM is cheaper than ABX and NEM because it doesn’t trade on the NYSE as stocks are only listed in London and Australia.

Goldcorp (NYSE: GG)

Goldcorp is a company focused on the Americas, its all-in sustaining costs are around $825. The main goal of the company is to increase production by 20%, lower costs by 20%, and increase reserves at the same rate until 2021. At the same time, it wishes to bring net debt to zero which should be possible if gold prices stay at these levels.

Figure 14: Goldcorp’s operations and plan. Source: GG.

However, up to 2021, GG plans to heavily invest in the development of its mines. So if you’re looking for a growth company, unlike ABX and NEM, GG could be the stock for you as the dividend could be raised after 2021 but that depends on other potential projects and on the price of gold, of course.

Figure 15: GG’s capex for the next 5 years is high in comparison to operating cash flows of $1 billion. Source: GG.



However, if they manage to increase production by 2021, and lower mining costs, their free cash flow could come to a similar rate to the current price to cash flow of 9.45 which is a good level among gold miners. However, such growth doesn’t work well if gold prices fall as has been the case in the past and GG has suffered in the last 3 years.

Figure 16: GG’s stock price in the last 3 years. Source: CNN Money.

Agnico Eagle Mines (NYSE: AEM)

AEM will produce 1.5 million ounces of gold in 2018 and expects to produce 2 million ounces of gold in 2020 with all in sustaining costs of $845.

Figure 17: Production expectations – growth stock. Source: AEM.

AEM also has an average reserve grade of 2.25 grams per ton which is much higher than the average grades. Further, AEM has most of its mines in Canada with one mine in Finland and 3 smaller mines in Mexico. The major Canadian exposure lowers the political risk for the miner.

Most of AEM’s mines are underground operations so that counters the high grades as underground mining can be costly and risky. Nevertheless, the company has been doing very well in the past and it could be expected that it will do so also in the future.

The safe jurisdiction, high ore grades, and growth potential lead also to a price to cash flow ratio of 15 which is relatively high for miners.

Wheaton Precious Metals (NYSE: WPM)

WPM is another royalty company, but it is smaller than Franco-Nevada. It has deals with 20 operating mines and 9 development projects.

Figure 18: WPM’s business. Source: WPM.

WPM has a dividend yield of 1.53% which is the highest of the companies we have discussed so far. The price to cash flow is also high at 17.8. Consider that WPM has no development, sustaining, or any kind of mining costs, so the price to cash flow can’t really be compared with other miners. Perhaps it’s best to use the price to earnings ratio which is at 46 in this case, and relatively high. I personally like the royalty business model, but see it as a bit overvalued at this point in time and therefore prefer regular miners.

Randgold Resources (NASDAQ: GOLD)

GOLD is an African-focused miner with operations in Mali, DRC, Senegal, and the Ivory Coast.

Figure 19: GOLD’s operations. Source: GOLD.



GOLD might look equally priced as other miners with a price to cash flow ratio of 17, but it is expected that the $2.5 billion investments GOLD has made in the past into the Kibali mine in the DRC will finally to full production in 2018 expected to be at 730,000 ounces of gold.

What’s interesting is that GOLD has a lot of issues with the local governments. The DRC has been changing the mining code which would increase the taxes payable while the government of the Ivory Coast has issues with illegal gold mining, non transparent exploration permit granting, etc.

What is good about GOLD is that it has no debt and high free cash flows of $4 per share, that however still leads to a price to free cash flow ratio of 25. Given the jurisdiction, I would require a lower valuation for such a company but there is a lot of potential growth coming from mining in Africa and all of that at a low cost. If GOLD can replicate what it has done in the last 10 years in relation to exploration as it grew revenues 6 fold, then the high valuation is justified.

Royal Gold (NASDAQ: RGLD)

RGLD is another royalty company that invest in the development of a project in order to get a royalty payment afterward. The company has invested in 197 projects and some of those are very attractive long term mines about to become operational.

Figure 20: Example of RGLD’s investments. Source: RGLD.

There is little risk and therefore a price to cash flow of 18. However, the same company had a price of $32 just two years ago so being patient is the key with gold miners and then snapping the good ones like RGLD when the time is right. Paying too much is too risky even if things look great now.

Figure 21: RGLD’s stock price in the last 3 years. Source: CNN Money.

Kinross Gold (NYSE: KGC)

KGC produces about 2.5 million ounces of gold per year at all-in sustaining costs of around $1,000 which are a bit higher then what I’ve mentioned above. KGC has a price to cash flow of just 6 but a price to free cash flow of 75 as the company has higher costs and is developing its projects. It is expected that all the projects will be developed by 2020.

Figure 22: KGC’s development strategy. Source: KGC.



As the company has no debt maturity up to 2021, it can invest heavily. The Tasiast phase two project will increase production from the current 250,000 ounces to around 800,000 ounces. There are other projects, but what can you expect from a higher cost producer is extreme leverage to gold prices.

Conclusion

I hope you enjoyed the first part of this gold miner analysis. What’s important to look at is how the above companies fit your portfolio and risk reward requirements.

The above are the largest global gold miners and 3 royalty companies. I personally prefer smaller miners, the risk may be higher but the upside is also higher due to lower valuations and more growth potential.

Keep reading Investiv Daily as we still have another 40 gold miners to analyze.



By Sven Carlin Commodities Gold Gold Miners Investiv Daily Share: