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4 Gold Stocks to Watch Despite the Metal Losing its Sheen
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The prospects for the Zacks Mining - Gold industry seem dull owing to lackluster gold prices. The metal lost steam early this year amid vaccine rollouts and optimism over economic recovery, and is currently trading below the psychological level of $1,800 an ounce, on a stronger U.S dollar. While geopolitical tensions, the emergence of coronavirus strains, and demand in China and India might lend support, volatility remains a concern.
Nevertheless, Barrick Gold Corporation (GOLD - Free Report) , Franco-Nevada Corporation (FNV - Free Report) , Agnico Eagle Mines Limited (AEM - Free Report) , and Yamana Gold Inc. are well poised on their strong balance sheets and initiatives to lower costs.
About the Industry
The Zacks Mining - Gold industry comprises companies that are engaged in extracting gold from mines, which are either underground or open pits. Mining is a long and complex process and requires significant financial resources. Exploration to evaluate the size of the deposit followed by assessment of ways to extract and process the ore efficiently, safely and responsibly, followed by the development of the mine, precedes the actual mining process. It takes normally 10-20 years for a gold mine to produce material that can be refined. The players in the industry nowadays use a range of sophisticated techniques to extract gold and convert it into doré bars, which is an alloy of gold and silver, alongside other impurities. These are then sent for purification, following which the gold is purchased in the form of bars or coins or used in jewelry or for other purposes.
What's Shaping the Future of Mining-Gold Industry
Volatility in Gold Prices a Concern: Gold had an impressive run in 2020 gaining 25% primarily fueled by the coronavirus pandemic. Vaccine rollouts and strong optimism over economic recovery put a rein on the rallying gold prices earlier this year. Gold is currently at around $1,790 an ounce, having lost 5.6% of its value year to date. The metal has been under pressure lately from a stronger dollar, higher U.S Treasury yields, and uncertainty over the U.S. Federal Reserve's tapering timeline. Per the World Gold Council, gold ETFs have seen global outflows of $7.4 billion in January-August as larger funds, particularly in North America, have lost assets and moved in tandem with gold prices. Nevertheless, geopolitical tensions and the spread of the highly contagious Delta variant might support gold prices.
Cost Control & Innovation to Increase Efficiency: Mining companies are major consumers of energy with around 50% of their production costs closely linked to energy prices. Meanwhile, the industry has been facing a shortage of skilled workforce that has led to a spike in wages. Since the industry cannot control gold prices, it focuses on improving sales volume, operating cash flow, and lowering unit net cash costs. The industry participants are also opting for alternate energy sources such as solar or wind farms to minimize fuel-price volatility and secure supply. Miners are now committed to cost-reduction strategies and digital innovation to drive operating efficiencies.
India and China Might Lift Demand: India and China together account for around 50% of consumer gold demand. Per the World Gold Council, total holdings of Chinese gold ETFs increased 0.8 tons in August to 72 tons — the second highest in history on a monthly basis. China witnessed the highest jewelry demand in the first half of 2021 since 2015, aided by the strengthening Chinese economy. Demand in China will remain high as policymakers continue to focus on stimulating domestic consumption, with initiatives such as shopping festivals. Meanwhile, retail demand in India is strengthening on improved consumer sentiment following the economic revival after the second wave of COVID-19. Historically, gold demand in India has been high in the latter part of the year courtesy of the wedding and festive season, when buying the yellow metal is considered auspicious.
Impending Demand and Supply Imbalance: The industry players are currently dealing with depleting resources, declining supply in old mines, and lack of new mines. Owing to the scarcity of new discoveries and depleting existing resources, miners are preferring to build up reserves through acquisitions rather than digging for new ones that are inherently risky and capital intensive. On the demand side, the use of gold across energy, healthcare, and technology is on the rise. The yellow metal has long been considered a safe-haven investment in times of financial or political uncertainty. Emerging market central banks are turning their attention to gold. So, there will be an eventual demand-supply imbalance that is likely to drive gold prices, which bodes well for the industry over the long haul.
Zacks Industry Rank Indicates Dismal Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects in the near term. The Zacks Mining- Gold Industry, which is a 38-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #190, which places it at the bottom 25% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. So far this year, the industry’s earnings estimate for the current year has plunged 26%.
Despite the bleak near-term prospects, we will present a few Mining – Gold stocks that one can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags Broader Market
The Mining-Gold Industry has underperformed the S&P 500 Index and the Basic Material sector in a year’s time. While the stocks in the industry have collectively declined 32.3%, the S&P 500 has gained 33.5%. Meanwhile, the sector has rallied 21.4%.
One-Year Price Performance
Industrys Current Valuation
On the basis of forward 12-month EV/EBITDA, which is a commonly used multiple for valuing gold-mining companies, we see that the industry is currently trading at 5.28X compared with the S&P 500’s 14.79X and the Basic Material sector’s forward 12-month EV/EBITDA of 3.91X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Over the last five years, the industry has traded as high as 9.40X and as low as 4.63X, with the median being at 6.59X.
4 Mining-Gold Stocks to Keep an Eye On
Barrick Gold: Its strong liquidity position and healthy cash flows position it well to take advantage of attractive development, exploration, and acquisition opportunities. The company’s growth projects — Turquoise Ridge third shaft, Goldrush and the Pueblo Viejo plant and tailings expansion are currently in execution. These projects are advancing per schedule as well as within budget, which underpins the next generation of profitable production from the core region. Also, the combination of Turquoise Ridge and Twin Creeks delivers a tier-one asset with another in the making at Goldrush. It recently announced that the Porgera gold mine is on track to resume operations later this year. Porgera churned out about 597,000 ounces of gold in 2019 – before being put on care and maintenance in April 2020. Despite the positives, the company’s shares have declined 16.4% in the past three months in tandem with the gold prices.
The Zacks Consensus Estimate for earnings for this Toronto, Canada-based company’s fiscal 2021 has moved up 3.7% over the past 60 days. The company pulled off a trailing four-quarter earnings surprise of 16%, on average. It currently carries a Zacks Rank #3 (Hold) and has a long-term estimated earnings growth rate of 2%.
Price & Consensus: GOLD
Franco-Nevada Corporation: Franco-Nevada appears to be on a promising long-term trajectory backed by a healthy portfolio of streaming and royalty agreements on many properties mined by some of the most reputable mining companies in the world. Franco-Nevada will benefit from the ongoing ramp-up at Cobre Panama, strong production from Antamina as well as contributions from Haynesville, Condestable, and Vale S.A’s (VALE) debentures acquisitions in 2021. Its continued focus on cost management and a debt-free balance sheet add to the positives. Owing to the decline in gold prices, the company’s shares have lost 6.8% in the past three months.
The Toronto, Canada-based gold-focused royalty and stream company has a long-term estimated earnings growth rate of 4%. The Zacks Consensus Estimate for earnings for fiscal 2021 has been revised upward by 5% over the past 60 days. The Zacks Ranked #3 stock pulled off a trailing four-quarter earnings surprise of 16.8%, on average.
Agnico Eagle Mines: The company has increased its exploration budget and is reinvesting in assets to expand output. It is expected to gain from the Kittila mine in Finland — the largest primary gold producer in Europe. The Kittila expansion is expected to enhance mine efficiency and lower current operating costs. It is anticipated to gain from the Hope Bay acquisition and the Hammond Reef project. Agnico Eagle Mines also has access to Meliadine and Canadian Malartic, major contributors to its quarterly production. It recently announced that it is making investment in Candelaria mining that will take its stake to 19.6% from the current 7.8%. It is committed to boosting shareholders’ return while maintaining healthy cash flows and lowering debt levels. Shares of the company have declined 22.2% over the past three months mirroring the recent fall in gold prices.
The Zacks Consensus Estimate for fiscal 2021 earnings has moved up 4.1% over the past 60 days. The company has a long-term estimated earnings growth rate of 1%. It delivered a trailing four-quarter earnings surprise of 12.9%, on average. The Toronto, Canada-based company currently carries a Zacks Rank #3.
Price & Consensus: AEM
Yamana Gold: The company plans to continue building on this base through expansion and optimization initiatives at existing operating mines, development of new mines, advancement of its exploration properties, and looking for other consolidation opportunities with a primary focus on the Americas. By prudently investing in its exploration project pipeline, the company expects to steadily increase its mineral resource base and generate consistent long-term growth in production and cash flow. The company reported quarterly high production at Jacobina and Canadian Malartic in the second quarter of 2021 as well as a standout quarterly performance from Minera Florida and El Peñón. It has significantly improved its balance sheet and financial flexibility, and reduced debt levels. Its efforts to lower operating costs are expected to boost margins. The company’s shares have declined 18.5% in the past three months, mainly due to the volatility in gold prices.
This Toronto, Canada-based company’s 2021 earnings has moved up 17.3% over the past 60 days. The company delivered a trailing four-quarter earnings surprise of 21.8%, on average. The company has a Zacks Rank #3.
Price & Consensus: AUY
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4 Gold Stocks to Watch Despite the Metal Losing its Sheen
The prospects for the Zacks Mining - Gold industry seem dull owing to lackluster gold prices. The metal lost steam early this year amid vaccine rollouts and optimism over economic recovery, and is currently trading below the psychological level of $1,800 an ounce, on a stronger U.S dollar. While geopolitical tensions, the emergence of coronavirus strains, and demand in China and India might lend support, volatility remains a concern.
Nevertheless, Barrick Gold Corporation (GOLD - Free Report) , Franco-Nevada Corporation (FNV - Free Report) , Agnico Eagle Mines Limited (AEM - Free Report) , and Yamana Gold Inc. are well poised on their strong balance sheets and initiatives to lower costs.
About the Industry
The Zacks Mining - Gold industry comprises companies that are engaged in extracting gold from mines, which are either underground or open pits. Mining is a long and complex process and requires significant financial resources. Exploration to evaluate the size of the deposit followed by assessment of ways to extract and process the ore efficiently, safely and responsibly, followed by the development of the mine, precedes the actual mining process. It takes normally 10-20 years for a gold mine to produce material that can be refined. The players in the industry nowadays use a range of sophisticated techniques to extract gold and convert it into doré bars, which is an alloy of gold and silver, alongside other impurities. These are then sent for purification, following which the gold is purchased in the form of bars or coins or used in jewelry or for other purposes.
What's Shaping the Future of Mining-Gold Industry
Volatility in Gold Prices a Concern: Gold had an impressive run in 2020 gaining 25% primarily fueled by the coronavirus pandemic. Vaccine rollouts and strong optimism over economic recovery put a rein on the rallying gold prices earlier this year. Gold is currently at around $1,790 an ounce, having lost 5.6% of its value year to date. The metal has been under pressure lately from a stronger dollar, higher U.S Treasury yields, and uncertainty over the U.S. Federal Reserve's tapering timeline. Per the World Gold Council, gold ETFs have seen global outflows of $7.4 billion in January-August as larger funds, particularly in North America, have lost assets and moved in tandem with gold prices. Nevertheless, geopolitical tensions and the spread of the highly contagious Delta variant might support gold prices.
Cost Control & Innovation to Increase Efficiency: Mining companies are major consumers of energy with around 50% of their production costs closely linked to energy prices. Meanwhile, the industry has been facing a shortage of skilled workforce that has led to a spike in wages. Since the industry cannot control gold prices, it focuses on improving sales volume, operating cash flow, and lowering unit net cash costs. The industry participants are also opting for alternate energy sources such as solar or wind farms to minimize fuel-price volatility and secure supply. Miners are now committed to cost-reduction strategies and digital innovation to drive operating efficiencies.
India and China Might Lift Demand: India and China together account for around 50% of consumer gold demand. Per the World Gold Council, total holdings of Chinese gold ETFs increased 0.8 tons in August to 72 tons — the second highest in history on a monthly basis. China witnessed the highest jewelry demand in the first half of 2021 since 2015, aided by the strengthening Chinese economy. Demand in China will remain high as policymakers continue to focus on stimulating domestic consumption, with initiatives such as shopping festivals. Meanwhile, retail demand in India is strengthening on improved consumer sentiment following the economic revival after the second wave of COVID-19. Historically, gold demand in India has been high in the latter part of the year courtesy of the wedding and festive season, when buying the yellow metal is considered auspicious.
Impending Demand and Supply Imbalance: The industry players are currently dealing with depleting resources, declining supply in old mines, and lack of new mines. Owing to the scarcity of new discoveries and depleting existing resources, miners are preferring to build up reserves through acquisitions rather than digging for new ones that are inherently risky and capital intensive. On the demand side, the use of gold across energy, healthcare, and technology is on the rise. The yellow metal has long been considered a safe-haven investment in times of financial or political uncertainty. Emerging market central banks are turning their attention to gold. So, there will be an eventual demand-supply imbalance that is likely to drive gold prices, which bodes well for the industry over the long haul.
Zacks Industry Rank Indicates Dismal Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects in the near term. The Zacks Mining- Gold Industry, which is a 38-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #190, which places it at the bottom 25% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. So far this year, the industry’s earnings estimate for the current year has plunged 26%.
Despite the bleak near-term prospects, we will present a few Mining – Gold stocks that one can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags Broader Market
The Mining-Gold Industry has underperformed the S&P 500 Index and the Basic Material sector in a year’s time. While the stocks in the industry have collectively declined 32.3%, the S&P 500 has gained 33.5%. Meanwhile, the sector has rallied 21.4%.
One-Year Price Performance
Industrys Current Valuation
On the basis of forward 12-month EV/EBITDA, which is a commonly used multiple for valuing gold-mining companies, we see that the industry is currently trading at 5.28X compared with the S&P 500’s 14.79X and the Basic Material sector’s forward 12-month EV/EBITDA of 3.91X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Over the last five years, the industry has traded as high as 9.40X and as low as 4.63X, with the median being at 6.59X.
4 Mining-Gold Stocks to Keep an Eye On
Barrick Gold: Its strong liquidity position and healthy cash flows position it well to take advantage of attractive development, exploration, and acquisition opportunities. The company’s growth projects — Turquoise Ridge third shaft, Goldrush and the Pueblo Viejo plant and tailings expansion are currently in execution. These projects are advancing per schedule as well as within budget, which underpins the next generation of profitable production from the core region. Also, the combination of Turquoise Ridge and Twin Creeks delivers a tier-one asset with another in the making at Goldrush. It recently announced that the Porgera gold mine is on track to resume operations later this year. Porgera churned out about 597,000 ounces of gold in 2019 – before being put on care and maintenance in April 2020. Despite the positives, the company’s shares have declined 16.4% in the past three months in tandem with the gold prices.
The Zacks Consensus Estimate for earnings for this Toronto, Canada-based company’s fiscal 2021 has moved up 3.7% over the past 60 days. The company pulled off a trailing four-quarter earnings surprise of 16%, on average. It currently carries a Zacks Rank #3 (Hold) and has a long-term estimated earnings growth rate of 2%.
Price & Consensus: GOLD
Franco-Nevada Corporation: Franco-Nevada appears to be on a promising long-term trajectory backed by a healthy portfolio of streaming and royalty agreements on many properties mined by some of the most reputable mining companies in the world. Franco-Nevada will benefit from the ongoing ramp-up at Cobre Panama, strong production from Antamina as well as contributions from Haynesville, Condestable, and Vale S.A’s (VALE) debentures acquisitions in 2021. Its continued focus on cost management and a debt-free balance sheet add to the positives. Owing to the decline in gold prices, the company’s shares have lost 6.8% in the past three months.
The Toronto, Canada-based gold-focused royalty and stream company has a long-term estimated earnings growth rate of 4%. The Zacks Consensus Estimate for earnings for fiscal 2021 has been revised upward by 5% over the past 60 days. The Zacks Ranked #3 stock pulled off a trailing four-quarter earnings surprise of 16.8%, on average.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: FNV
Agnico Eagle Mines: The company has increased its exploration budget and is reinvesting in assets to expand output. It is expected to gain from the Kittila mine in Finland — the largest primary gold producer in Europe. The Kittila expansion is expected to enhance mine efficiency and lower current operating costs. It is anticipated to gain from the Hope Bay acquisition and the Hammond Reef project. Agnico Eagle Mines also has access to Meliadine and Canadian Malartic, major contributors to its quarterly production. It recently announced that it is making investment in Candelaria mining that will take its stake to 19.6% from the current 7.8%. It is committed to boosting shareholders’ return while maintaining healthy cash flows and lowering debt levels. Shares of the company have declined 22.2% over the past three months mirroring the recent fall in gold prices.
The Zacks Consensus Estimate for fiscal 2021 earnings has moved up 4.1% over the past 60 days. The company has a long-term estimated earnings growth rate of 1%. It delivered a trailing four-quarter earnings surprise of 12.9%, on average. The Toronto, Canada-based company currently carries a Zacks Rank #3.
Price & Consensus: AEM
Yamana Gold: The company plans to continue building on this base through expansion and optimization initiatives at existing operating mines, development of new mines, advancement of its exploration properties, and looking for other consolidation opportunities with a primary focus on the Americas. By prudently investing in its exploration project pipeline, the company expects to steadily increase its mineral resource base and generate consistent long-term growth in production and cash flow. The company reported quarterly high production at Jacobina and Canadian Malartic in the second quarter of 2021 as well as a standout quarterly performance from Minera Florida and El Peñón. It has significantly improved its balance sheet and financial flexibility, and reduced debt levels. Its efforts to lower operating costs are expected to boost margins. The company’s shares have declined 18.5% in the past three months, mainly due to the volatility in gold prices.
This Toronto, Canada-based company’s 2021 earnings has moved up 17.3% over the past 60 days. The company delivered a trailing four-quarter earnings surprise of 21.8%, on average. The company has a Zacks Rank #3.
Price & Consensus: AUY