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Gold Fields (GFI) Shares Up 53% in April; Should You Buy?

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Gold Fields GFI stock is up 53.2% so far in April, as the pandemic took a toll on the market, pushing investors to safe havens.

 

So given the panic selling and unusual buying that’s making the market particularly volatile at this time, it’s worth asking the question about whether the shares have more room to run.

So the first thing to check is the valuation. On a price-to-forward-12-months earnings basis, the shares have a 13.2X multiple, which is below its median level over the last six months. In contrast, the S&P 500 has a multiple of 18.71X, which is above its median level. It’s also undervalued on the basis of EV-to forward 12 months’ EBITDA.

 

On most other metrics, including price-to-tangible book value, price-to-cash flow and price-to-forward sales for 2020, the shares are trading above their median value, while the S&P 500 is trading below its median value.

So the shares aren’t cheap on some considerations. But could further upside be warranted? Let’s see.

First, one cannot stress enough the value of gold as a safe haven. In a world of fiat currencies that constantly depreciate in value as the government prints more notes as a matter of policy, this is a solid asset that has appreciated steadily in value over decades.

Second, it’s hard to see depreciation in the value of gold, especially given that gold resources are limited. In fact, the World Gold Council estimates that world gold production in 2019 dropped for the first time since 2008 with mine supply dropping for the first time in 10 years. With limited new gold discoveries since the mid-1990s, gold reserves at producers are also coming down. The industry is consolidating as it musters resources for this activity (Barrick Gold merging with Randgold and Newmont Gold with Goldcorp).

Gold Fields spent a billion dollars over the last three years to build its resources, including green fields, allowing it to maintain steady production levels of 2.0-2.5 Moz (millions of ounces) for the next 10 years. Part of the money went toward building two new mines: Gruyere in Australia (50% share) and Damang in Ghana, while increasing its stake at the existing Ghana JV to 45%.

The company has well-diversified global operations with interests in 7 operating mines generating an annual gold-equivalent production of approximately 2.2 million ounces. So 40% of its global production comes out of Australia, followed by 37% from Ghana, 13% from Peru and 10% from South Africa. In addition, its green field operation, Salares Norte in Chile, is getting ready for construction. This diversification across most continents and regions with major gold resources also means a diversification of its risks. So as and when any region comes out of the pandemic or starts normal functioning, so will Gold Fields.

African countries barring South Africa have been relatively less affected by the pandemic, so this should be positive for GFI. Additionally, South Africa recently decided to allow mines to start operations at 50% capacity, gradually becoming fully operational by next month (the government is concerned that a prolonged shutdown will put 45K jobs at risk). Australia, its other big market, will come out of the lockdown in stages, beginning next month.

Gold Fields recently completed an ambitious restructuring of its South Africa operations that reduced its headcount by 35% and increased employee productivity (tonnes mined per employee, at 418t, is up 45% in 2019 from 2018, although still behind the targeted 477t). The leaner operations will prove beneficial in a post-pandemic world.  

One thing to keep in mind is the leveraged balance sheet with a net debt position at 2019-end of $1.62 billion. The company also has significant current maturities although debt reduction is an important management objective ($300-400 million reduction targeted in 2020).

Conclusion

Sandton, South Africa-based Gold Fields Limited, which has gold mineral reserves of approximately 49 million ounces, copper mineral reserves of 764 million pounds and mineral resources totaling 4,881 million pounds remains one of the lower-risk investments today for a number of reasons outlined above. That justifies its Zacks Rank #1 (Strong Buy) rating.

But you can also dig into other gold stocks like AngloGold Ashanti Limited AU, Barrick Gold Corp. GOLD, Gold Standard Ventures Corp. GSV, Kinross Gold Corp. KGC or Sandstorm Gold Ltd. (SAND - Free Report) , all of which share the same rank.

 

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