Gold Mining Stocks' Near-Term Prospects Shine Bright

Madhurima Das

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:

  • So far this year, gold prices have gained 15.5% and surpassing the $1,500 an ounce threshold for the first time in six years. Uncertainty over the U.S.-China trade war, geopolitical tensions and concerns over the global economy have fueled investor apprehensions, which in turn is driving the demand for gold. Further, three rate cuts by the Fed this year has been favoring the rally. 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. Rising gold prices bode well for the Mining - Gold industry, which has to contend with escalating production costs including the cost of electricity, wages, water and materials.
     
  • 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 to 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.
     
  • 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 #43, which places it at the top 17% 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 43%.

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 47.2%, the S&P 500 has rallied 17.7%. Meanwhile, the sector has dipped 1.1%.
 
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 6.8X compared with the S&P 500’s 12.2X and the Basic Material sector’s forward12-month EV/EBITDA of 5.8X. 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 9.6X and as low as 4.7X, with median being at 6.78X.

Bottom Line

The prospects of a dwindling supply looms large on the gold-mining industry. Meanwhile, demand will remain strong driven by India and China. The technology sector is also driving demand for the yellow metal. Lower mined gold supply, higher demand and geopolitical tensions are likely to drive prices north, which bode well for gold-miners.

We are presenting two stocks with a Zacks Rank #1 (Strong Buy) and two with a 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.

Kirkland Lake Gold Ltd. (KL): This Toronto, Canada-based company sports a Zacks Rank #1. The Zacks Consensus Estimate for earnings for fiscal 2019 has improved 13% over the past 90 days. The Zacks Consensus Estimate for fiscal 2019 projects year-over-year growth of 97.1%. The company beat estimates in the trailing four quarters by 11.12%, on average. Shares of this company have surged 82% in the past year.

Price and Consensus: KL



Yamana Gold Inc. (AUY): This Toronto-based company flaunts a Zacks Rank #1. The Zacks Consensus Estimate for earnings for fiscal 2019 has gone up 71% over the past 90 days. The company beat estimates in the trailing four quarters by 100%, on average. Shares of the company have surged 74% in a year’s time.

Price and Consensus: AUY



Franco-Nevada Corporation (FNV): This Toronto, Canada-based company is a Zacks Rank #2 stock. The Zacks Consensus Estimate for earnings for fiscal 2019 has improved 8% over the past 90 days. The Zacks Consensus Estimate for fiscal 2019 projects year-over-year growth of 45.3%. The company beat estimates in the trailing four quarters by 11.75%, on average. Shares of the company have appreciated 39% in the past year.

Price and Consensus: FNV



B2Gold Corp. (BTG): The Zacks Consensus Estimate for fiscal 2019 earnings of this Vancouver, Canada-based company has improved 15% over the past 90 days. The estimate suggests growth of 43.75% over the prior fiscal. The company beat estimates in the trailing four quarters by 11.31%, on average. The stock carries a Zacks Rank #2. Its shares have gone up 48% over the past year.

Price and Consensus: BTG

 

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