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Gold Mining Stocks Outlook: Is the Industry Losing Sheen?

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The Zacks Gold Mining industry primarily includes companies that are engaged in the mining of gold. These companies comprise big and small players that extract gold from mines of widely varying types and scale.
 
Notably, gold mining is a long and complex process. Before gold can be extracted, significant exploration and development is required to assess the size of the deposit as well as how to extract and process the ore efficiently, safely and responsibly. On average, it takes between 10-20 years before a gold mine is even ready to produce material that can be refined. The mining, processing, development and mineral exploration activities are subject to several laws governing prospecting, development, production, taxes, labor standards and environmental regulation in various jurisdictions in which these companies operate.
 
Let us take a look at the three major themes in the industry:
  • The Mining - Gold industry is subject to fluctuations in gold prices which have been affected by a gamut of factors lately, including a stronger U.S. dollar, interest rate hikes and U.S-China trade war apprehensions. On top of this, the gold-mining industry has to contend with escalating production costs including the cost of electricity, wages, water and materials. With no control over gold prices, the industry has to focus on improving sales volumes while being cost-effective at the same time. It also has to concentrate efforts on operating efficiently and lowering debt levels to maintain margins.
     
  • The pending merger between Barrick Gold Corporation (ABX - Free Report) and Randgold Resources Limited has revived interest in the gold mining industry by triggering expectations of further such consolidation in the space. The merger will create an industry-leading gold company with the highest concentration of tier one gold assets with the lowest total cash cost position among senior gold peers. Notably, mining deals have lost momentum in recent years, with companies forced to cut debt levels and slash capital expenditure owing to lower gold prices. In fact, gold production is anticipated to drop eventually as new discoveries remain scarce, existing resources dwindling and grades declining. These factors will likely compel miners to resort to adding reserves through acquisitions than digging for new ones which are inherently risky and capital intensive.
     
  • Major markets India and China (that roughly account for around 50% of consumer gold demand) will continue to support demand for gold. In the last decade, combined demand for gold from India and China has soared 71%. The expanding middle class in China and India, combined with broader economic growth, will have a significant impact on gold demand. Further, use of gold across energy, healthcare and technology is changing rapidly. Moreover, gold has long been considered as a safe haven investment in times of financial or political uncertainty. Emerging market central banks are turning their attention to gold after years of exposure to the U.S. dollar, and as a natural currency hedge against other reserve currencies. So, there will be an eventual demand-supply imbalance that is likely to aid in bolstering gold prices, which bodes well for the industry in 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 gloomy prospects in the near term. The Zacks Mining- Gold Industry, which is a 33-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #226, which places it at the bottom 12% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
 
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential.   Since the end of the second quarter, the industry’s earnings estimate for the current year has gone down 41%.
 
Our proprietary Heat Map shows that the industry’s rank has remained in the bottom half over the past seven weeks.
 
 
Despite the bleak near-term prospects of the industry, we will present a few mining-gold stocks that one can hold on to given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
 
Industry Lags S&P 500 and Sector on Shareholder Returns 
 
The Mining- Gold Industry has underperformed the S&P 500 as well as its own sector over the past year. The stocks in this industry have collectively dipped 16.6% in the past year while the Basic Materials Sector declined 8.3%. Meanwhile, the Zacks S&P 500 has gained 5.3% over the same period.
 
One-Year Price Performance
 
 
Mining- Gold Industry’s Valuation
 
On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing gold-mining companies, we see that the industry is currently trading at 6.5X compared with the S&P 500’s 11.9X. However, the industry is trading above the Basic Material sector’s forward 12-month EV/EBITDA of 5.9X. This is shown in the charts below.
 
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
 
 
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
 
 
Over the last five years, the industry has traded as high as 10.5X, as low as 5.2X and at the median of 7.2X.
 
Bottom Line
 
The prospects of a dwindling supply looms large on the gold-mining industry. Meanwhile, demand will remain strong with India and China continuing to be the major drivers. Demand for gold is also on the rise from the technology sector. The combination of lower mined gold supply and higher demand along with geopolitical tensions could eventually drive the prices north, which bodes well for gold-miners.
 
None of the stocks in the Zacks mining-gold space currently sport a Zacks Rank #1 (Strong Buy). However, we are presenting one stock with a Zacks Rank #2 (Buy) that is well positioned to grow combating the challenges. There are other 3 stocks with Zacks Rank #3 (Hold) that investors may currently hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Sibanye Gold Limited (SBGL - Free Report) : This Westonaria, South Africa-based company carries a Zacks Rank #2. The Zacks Consensus Estimate for earnings for fiscal 2018 has gone up 100% over the past 60 days.
 
Price and Consensus: SBGL
 
 
Gold Fields Limited (GFI - Free Report) : This Sandton, South Africa-based company carries a Zacks Rank #3. The Zacks Consensus Estimate for earnings for fiscal 2018 has gone up 17% over the past 60 days. Over the past 60 days, the Zacks Consensus Estimate for the company has improved to a loss of 16 cents per share from the prior loss of 17 cents per share.
 
Price and Consensus: GFI
 
 
Golden Star Resources Ltd. (GSS - Free Report) : This Toronto, Canada-based company has a Zacks Rank #3. The Zacks Consensus Estimate for earnings for fiscal 2018 has gone up 17% over the past 60 days.
 
Price and Consensus: GSS
 
 
Kirkland Lake Gold Ltd. (KL - Free Report) : This Toronto, Canada-based company is a Zacks Ranked #3 stock. The Zacks Consensus Estimate for earnings for fiscal 2018 has gone up 2% over the past 60 days. The company has delivered an average positive earnings surprise of 9.37% over the trailing four quarters.
 
Price and Consensus: KL
 
 
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