- The top 10 gold miners are stable producers. The next 10 discussed today are a completely different ballgame.
- The miners discussed today are much more leveraged to gold prices.
- Investing in such companies might be less risky and provide higher upside if done with a proper investing strategy.
This article is the second in a series of articles that cover the 50 gold miners held by the Van Eck Gold Miners ETF (GDX). For more info about the purpose of these articles, please read the first article in the series where I analyzed the top 10 global gold miners.
The discussed miners in today’s article are the following:
The second bunch of gold miners make up only 20% of the GDX ETF while the first 10 make up 54%. As you saw from the first article, the top 10 offer stability and low-cost production. The 10 upcoming miners are different animals, but there is a strategy that might work for them.
Anglogold Ashanti Ltd (NYSE: AU)
AU is immediately interesting as it has a price to cash flow of just 4.16. The company has 17 mines in 9 countries and has almost 50 million ounces of gold reserves.
All-in sustaining mining costs are relatively high at $1,100 per ounce. There’s also debt of $2 billion, but the company manages to remain profitable thanks to the high production of about 3.5 million ounces per year.
AU is therefore an extremely leveraged gold play. If gold prices increase, so will AU because its margins will expand disproportionately. As gold prices haven’t been much higher than AU’s mining costs, the stock hasn’t performed well in the last 3 years.
Thus AU is a leveraged gold price play that really needs higher gold prices. This means that you need to own less of AU as a gold hedge and then rebalance accordingly. Or in other words, if gold prices fall you could lose everything you’ve invested in AU, so it’s better to lose 1% than it is to lose 3% of your portfolio.
Cia De Minas Buenaventura (NYSE: BVN)
BVN is a is a Peruvian precious metals producer. The curious thing is that the company hasn’t been profitable up until this year and a ruling from the Peruvian court that forced their affiliate investment, Cerro Verde of which they own 19%, to pay $376 million doesn’t help. Nevertheless, the company has revenues of $1.2 billion, produces about 600,000 ounces of gold, and 20 million ounces of silver in addition to significant zinc and copper production.
The profits for the first 9 months of 2017 were $0.32 per share. Given the higher prices of all those metals, BVN might be a turnaround story as the management is focused on lowering production costs by applying a de-bottlenecking program.
If the company manages to improve its efficiency, it could bring earnings to $1 per share easily and cash flows to $1.5 which would give a price to cash flow ratio of 10. However, the stock was trading below $5 just two years ago and that shows how important it is to buy miners when things are bad, not good.
Evolution Mining (ASX: EVN)
A price to cash flow of 7.13, and a dividend of 1.75%. EVN operates 5 mines in Australia and has one promising development project, the Ernest Henry. The company produced 844,000 gold ounces in 2017 and guides for 750,000 in 2018 at all-in sustaining costs of $850. The group’s reserve life is 9 years.
The key with smaller miners like EVN is to understand the business model. With EVN, it’s all about exploration and expanding current deposits which is always a risk but also provides a lot of upside.
As there is a lot of mining history in Australia, they might find new orebodies but there is also the possibility that the cash produced ends up in new acquisitions to keep production up. With EVN, you’re ok for the next 8 years so there is plenty of room for upside plus the dividend is good at 1.75%. (Check to see how Australian dividend taxes apply.)
Gold Fields (NYSE: GFI)
A price to cash flow of 4.37, and a dividend yield of 1.74%. As I go down on the ETF list, it means that stocks have lower market capitalizations and that’s a surprise for GFI because it’s a company that produced 2.14 million ounces of gold in 2017, almost three times what Evolution produced.
However, gold has a bit more debt than many miners with total debt at almost $3 billion but net debt is at around $1.4 billion. There will be need for refinancing in 2019.
The forecast is that GFI will produce more in the future at lower costs which would allow it to pay back its debt. If higher gold prices help, GFI could explode.
The price to book value is 1.03. The trailing cash flows are $700 million, but the free cash flow is just $100 million as the company is investing heavily.
As we have seen before, the market seems not to like companies that invest in growth and sacrifice current cash flows. If you like that, GFI looks cheap.
The main issue with GFI is the costs related to its South Deep project but if the company manages to bring the mine to steady production, it could operate positively for the next 70 years. A stock to investigate further.
Yamana Gold (NYSE: AUY)
AUY overs a dividend of 0.63%, its price to cash flow is 6.16, and its price to book is just 0.67.
Yamana has lots of assets in South America, but it also has a high debt level of $1.6 billion. It’s also close to breaching its debt covenants if all doesn’t go according to plan and it might need some financing in the short term. That is the reason why this stock might look cheap. However, the risk reward doesn’t look that bad.
Yamana has relatively high all-in sustaining costs for all the metals it produces which makes it highly leveraged to metal prices in addition to the debt it has.
To sum up about Yamana, it all depends on how the management manages the situation. Higher gold prices would be a strong tailwind while lower metals prices might jeopardize the whole company.
Nevertheless, we are now at a point that shows how variegate valuations are in the gold mining industry.
Kirkland Lake Gold Ltd (NYSE: KL)
KL was one of the best performers in 2017 as the management delivered on its promise and this shows what the returns are if a development project succeeds.
The keys to their success were the increases in production and improved reserves thanks to exploration and acquisition. However, KL had a price to cash flow ratio of 6 back in December of 2016 which shows again how the market discounts future production until it is actually confirmed.
The price to book value is 2.23 and the price to cash flow is 11. The company is debt free now and will continue to buy back shares. If the company continues to deliver, this could grow further but it isn’t cheap anymore. I personally would prefer to find a new potential Kirkland.
B2Gold Crop (AMEX: BTG)
BTG is globally diversified across not-that-stellar jurisdictions.
The company expects to increase production by ramping up the Fekola mine in Mali.
A 50% increase in production would be very good news, especially if it comes alongside lower costs. As you can see above, BTG managed to almost exponentially increase its production over the past 6 years. The price to cash flow is high at 15, but we have to estimate what it will be when the company stops investing in Fekola and starts producing. Free cash flows in a conservative scenario would then be $0.3 per share for a price to cash flow of 9. Interesting company.
Northern Star Resources Ltd (ASX: NST)
Northern Star is another company that has delivered in the last few years by increasing production and increasing reserves. The company has no debt and a price to cash flow of 10.31, and a relatively high price to book of 5.5. The plan is to slowly grow production organically and lower costs which should lead to better margins.
All-in sustaining costs are around $930 per ounce which is why such companies will do extremely well in a higher gold price environment, with higher margins.
Iamgold Corp (NYSE: IAG)
IAG has relatively high mining costs of above $1,000 per ounce. The management expects to increase production by 20% up to 2020 and bring all-in sustaining costs down to $900.
The relatively high mining costs make this a leveraged to gold prices play.
Sibanye Stillwater (NYSE: SBGL)
Sibanye is a South African gold producer that recently acquired Stillwater, a platinum and palladium miner in the US. The African mining part has relatively high gold mining costs of $1,100 per gold ounce. The company has acquired Stillwater at what they believe is a cyclical downturn in the platinum cycle. However, if platinum prices remain depressed due to less demand as electric vehicle pressure intensifies it could be a badly timed acquisition.
The company increased its debt by $1 billion to acquire Stillwater and also increased its capital by $1 billion which was equal to 40% of its market capitalization. In December, the company decided to further consolidate the platinum play by acquiring another troubled platinum miner, Lonmin, for $382 million. The market didn’t like the developments as the stock is down 75% from its 2016 highs.
I must agree with the market as taking on so much debt to acquire a platinum play in the late part of the economic cycles is extremely risky given that demand for cars will decline in the next recession. Nevertheless, if you want a volatile stock to trade, SBGL is something for you.
Higher leverage to gold prices means that there will be more need for rebalancing, but it also means that one could take advantage of the volatility and increase one’s returns. By buying miners that are more leveraged to gold prices, you can keep an even smaller part of your portfolio in such stocks and if you rebalance accordingly, you might even reach some alpha.
As the smaller miners, and especially the growth miners, are much cheaper than the bigger miners, it might be an interesting investment strategy. Keep reading Investiv Daily as we still have 30 miners to discuss to cover all the stocks of the Van Eck Gold Miners ETF.