The Zacks Mining - Gold industry primarily comprises big and small companies that are engaged in gold extraction from mines of widely varying types and scale. Notably, gold mining is a long and complex process. Significant exploration and development to evaluate the size of the deposit followed by assessment of ways to extract and process the ore efficiently, safely and responsibly precedes actual mining. On average, it takes between 10-20 years for a gold mine 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:
- Gold prices have gained 15% so far this year and surpassed the $1,700 an ounce threshold for the first time in seven years. This was primarily driven by the coronavirus-induced crisis that triggered apprehensions regarding the global economic growth. This, in turn, sent investors scurrying for safe-haven assets like gold. The Fed has slashed interest rates to zero. Notably, lower the interest rates, lesser will be the opportunity cost of holding non-yielding bullion, making gold an attractive option for investors holding other currencies. Further, lower oil prices and fears of supply crunch with miners halting their operations as per government mandates to stem the coronavirus spread have also contributed to the price movement. Further, mining companies are major consumers of energy with around 50% of their production costs closely linked to energy prices. The current combination of higher gold prices and lower oil prices will translate into improved operating margins and higher free cash flow for miners.
- The $5.4 billion merger between Barrick Gold Corporation and Randgold Resources Limited last year followed by Newmont Mining Corporation’s acquisition of rival Goldcorp for $10 billion form Newmont Goldcorp Corporation (NEM), has revived the trend of consolidation in the industry. Mining deals had lost momentum in recent years with companies forced to cut debt levels and slash capital expenditure thanks to lower gold prices. Given that gold production is anticipated to drop eventually owing to scarcity of new discoveries and depleting existing resources, miners prefer to build up reserves through acquisitions rather than digging for new ones that are inherently risky and capital intensive.
- Going forward, major markets India and China (that roughly account for around 50% of consumer gold demand) will sustain demand for gold. The expanding middle class in China and India, and broader economic growth will have a significant impact on gold demand. Use of gold across energy, healthcare and technology is on the rise. Moreover, the yellow metal 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 drive gold prices, which bodes well for the industry over the long haul.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Mining- Gold Industry, which is a 32-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #19, which places it at the top 8% 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.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have been revised upward by 66%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Versus Broader Market
The Mining- Gold Industry has outperformed both the S&P 500 Index and the Basic Material sector in a year’s time. While the stocks in the industry have collectively advanced 40.7%, the S&P 500 has declined 4.6%. Meanwhile, the sector has slumped 25.8%.
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 5.96X compared with the S&P 500’s 12.29X and the Basic Material sector’s forward12-month EV/EBITDA of 5.95X. 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 8.68X and as low as 4.34X, with median being at 5.96X.
Gold will continue to be the preferred investment option supported by the environment of low interest rates and coronavirus-induced global slowdown. Lower mined gold supply, higher demand and geopolitical tensions are likely to drive prices north, which bode well for gold-miners.
None of the stocks in the industry carry a Zacks Rank #1 (Strong Buy) at present. We present five Zacks Rank #2 (Buy) that investors may take a look at. You can see the complete list of today’s Zacks #1 Rank stocks here.
Alamos Gold Inc. (AGI - Free Report) : The Zacks Consensus Estimate for 2020 earnings for this Toronto, Canada-based company indicates year-over-year growth of 25%. The estimate has moved north by 14% over the past 60 days The company has a trailing four-quarter positive earnings surprise of 9.82%, on average. The company has a long-term estimated earnings growth rate of 15.4%.
Price and Consensus: AGI
Kinross Gold Corporation (KGC - Free Report) : The Zacks Consensus Estimate for 2020 earnings has moved up 7% in the past 60 days. The estimate indicates year-over-year growth of 38%. The Toronto, Canada-based company has a trailing four-quarter positive earnings surprise of 182.5%, on average.
Price and Consensus: KGC
B2Gold Corp. (BTG - Free Report) : The Zacks Consensus Estimate for fiscal 2020 earnings of this Vancouver, Canada-based company suggests growth of 200% over the prior fiscal. The company has a trailing four-quarter positive earnings surprise of 23.8%, on average. The company has a long-term estimated earnings growth rate of 6.8%.
Price and Consensus: BTG
Barrick Gold Corp. (GOLD - Free Report) : The Toronto, Canada has an expected earnings growth of 40.6% for the current year. The Zacks Consensus Estimate for the current year earnings has gone up 4% over the last 60 days.The company has a trailing four-quarter positive earnings surprise of 17.9%, on average. The company has an estimated long-term earnings growth rate of 2%.
Price and Consensus: GOLD
Franco-Nevada Corp. (FNV - Free Report) : The Zacks Consensus Estimate for 2020 earnings for this Toronto, Canada-based company indicates year-over-year growth of 16%. The company has a trailing four-quarter positive earnings surprise of 18.8%, on average. The company has a long-term estimated earnings growth rate of 4%.
Price and Consensus: FNV