Tag: Gold Miners Index (GDX)

Which Is The Better Gold Mining Stock?

Posted on by Taylor Dart

While the general market (SPY) has suffered two violent legs down in its cyclical bear market, the Gold Miners Index (GDX) has suffered three legs down and has seen a much more violent bear market.

This has made the sector fertile ground for new investment ideas relative to other sectors. Still, with mining being a complex business and the gold price being quite volatile, the key to outperformance when dabbling in the sector is to own the highest-quality names.

In this update, we’ll look at two of the largest gold miners globally and determine which is the most attractive name from an investment standpoint - Agnico Eagle Mines (AEM) or Newmont Corporation (NEM).

Scale & Business Model

Newmont and Agnico Eagle Mines (“Agnico Eagle”) share very similar business models, given that they are two of the world’s largest gold producers that receive over 90% of their revenue from gold with limited contributions from other metals.

In Newmont’s case, it is the world’s largest gold producer, with 15 operating mines in Africa, North America, South America, and Australia, and annual production of 6.0 million ounces of gold (+ 1.3 million additional gold-equivalent ounces).

Meanwhile, Agnico Eagle has 13 mines across Canada, Finland, Australia, and Mexico and expects to produce 3.4 million ounces of gold this year.

Based on Newmont having slightly more mines (15 vs. 13), double the production profile, and having a massive development pipeline with over ten projects, it certainly wins from a scale standpoint. This slightly edges out Agnico Eagle’s smaller production profile and less robust development pipeline, though Agnico Eagle still has one of the best development pipelines among its peers.

It is also worth noting that while Agnico Eagle has a smaller production profile and slightly less diversification, its jurisdictional profile is superior, with 95% of future production coming from top-rated mining jurisdictions.

That said, Newmont wins by a hair in this category for investors looking for a global producer with diversity. Continue reading "Which Is The Better Gold Mining Stock?" →

Not All Gold Miners Are Created Equal

Posted on by Taylor Dart

It’s been a challenging two years for investors in the gold space, with the metals making no progress since Q3 2020 and the Gold Miners Index (GDX) suffering a 52% decline from its highs.

This violent bear market can be attributed to significant margin compression for most gold producers, with them being hit by inflationary pressures (fuel, steel, cyanide, labor) and the impact of a lower gold price on sales.

The result? Margins are down over 25% on average from Q3 2020 peak levels.

GDX Chart

(Source: TC2000.com)

On the surface, this might not seem like a very attractive investment thesis given that gold producers are price-takers, gold continues to trend lower, and they’re already seeing margin compression at $1,660/oz.

However, the 52% correction in the GDX has left sector-wide valuations at their lowest levels since 2018, when all-in-sustaining cost margins were at $200/oz, nowhere near the $500/oz margins currently.

Hence, I believe this negativity is more than priced into the sector, especially if gold can find a floor near $1,600/oz, which looks likely given that we have extreme pessimism.

That said, not all miners are created equal, so it’s essential to focus on quality and those names bucking the margin trend. In this update, we’ll look at two names trading at deep discounts to net asset value that have outstanding business models: Continue reading "Not All Gold Miners Are Created Equal" →

Two Standouts in the Gold Sector

Posted on by Taylor Dart

While the cyclical bear market in the S&P-500 (SPY) has created buying opportunities, the real value can be found in the Gold Miners Index (GDX).

This is because the sector has endured a 22-month bear market, sending many names down 60% from their highs.

Although several names offer compelling buying opportunities, two stand out as offering a rare mix of growth and value. These are i-80 Gold (IAUX) and Sandstorm Gold Royalties (SAND).

Investing in the precious metals sector can be treacherous and intimidating, with several names to choose from, multiple pitfalls, and lengthy technical reports describing each mine.

For this reason, the sector is often avoided by generalist investors. The proposition becomes even less interesting if we mix in a declining gold price.

However, there is one key trait in gold miners that allows investors to worry less about the gold price: production growth. The key is selecting names with growth and low-risk business models with a high probability of successful execution, which is easier said than done.

Sandstorm Gold Royalties (SAND)

Sandstorm Gold Royalties is a precious metal royalty/streaming company, giving it a lower-risk business model within the sector. This is because it provides upfront capital to operators/developers to construct/expand mines, and in exchange, it receives a portion of metal production over the mine life.

The result is that it’s highly diversified (dozens of revenue streams and jurisdictions), and it’s protected from inflation as it doesn’t have to pay for sustaining capital or get hit by rising operating costs.

In addition, it enjoys very high margins (80% plus gross margins), with it simply receiving gold deliveries of metals at a low fee ($10/oz to $500/oz gold) vs. $700/oz to $1,300/oz costs for operators.

The other major benefit of this model is that any discoveries on properties where it holds royalties are gravy, given that the mine can continue to deliver ounces for decades even if the mine life was estimated at only several years initially.

A couple of examples are an investment in Goldstrike which turned $2.0 million into $1.0 billion paid in royalties, and an investment in Cortez which translated to a 500% plus return for Royal Gold. This is why royalty/streaming companies commonly trade at a premium to their net asset value. Continue reading "Two Standouts in the Gold Sector" →

Gold Stocks Trading At Deep Discounts

Posted on by Taylor Dart

It’s been a mixed Q2 Earnings Season for the Gold Miners Index (GDX), with most producers posting solid operational results but revising cost guidance higher to reflect inflationary pressures. These pressures are related to fuel (diesel) and labor inflation, partially related to a tight labor market in prolific mining regions.

However, a few companies have bucked the trend, and others are in a position to claw back any margin declines experienced this year. These miners are the ones to own, and due to depressed sentiment in the sector, they’re trading at large discounts to their net asset value, with two being prime takeover targets.

Alamos Gold (AGI)

Alamos Gold (AGI) is a mid-cap gold producer operating in Mexico and Ontario, Canada, that has three mines and a development project in Manitoba.

The company was one of the few miners not to raise its cost guidance this year due to diesel hedges and operating high-grade underground mines. Notably, it’s also tracking nicely against production guidance, explaining the stock’s sharp rally following its Q2 results.

However, the real news for AGI was the release of its Island Gold Phase 3+ Study, which has outlined an operation capable of producing over 270,000 ounces per year at all-in sustaining costs below $600/oz.

This would make its Island Gold Mine (130,000 ounces per annum at ~$900/oz currently) one of the lowest-cost mines globally and a top-5 in Canada from a profitability standpoint. I believe this is a game-changer, but due to the poor sentiment sector-wide, the stock has not enjoyed the premium it should for this news.

Assuming the expansion is successful and the company can receive permits for its Lynn Lake Mine in Manitoba, Alamos has a path to become a 750,000-ounce producer at sub $850/oz costs by FY2027 a major upgrade from 460,000 ounces at $1,200/oz currently.

This should command a large premium to net asset value ($11.00 per share), yet it trades at a discount at a share price of $7.40, making this a rare opportunity to pick the stock up on sale. Continue reading "Gold Stocks Trading At Deep Discounts" →

Three Gold Miners on Sale

Posted on by Taylor Dart

Disgust. Despair. Robbed. These are just a few of the emotions likely felt by investors in the Gold Miners Index (GDX), which are looking at the ETF trade at the same level it did over two years ago when the gold price (GLD) sat below $1,525/oz.

Worse, this pathetic performance has occurred in a period when the Federal Reserve has been its most dovish in years ahead of the past two meetings.

Now, staring down the possibility of two additional rate hikes, it's understandable that investors are on pins and needles, worried about the effect of additional rate hikes on gold and the miners. As the saying goes, though, it's always darkest before the dawn, and with sentiment arguably the worst in years, I believe this has presented some opportunities in the gold miners.

GDX Chart

Source: TC2000.com

With the Federal Reserve's mission being to stamp out multi-decade inflation readings, they've adopted one of their most hawkish stances in years, planning to raise rates four times this year.

Conventional wisdom would suggest that does not make owning gold very attractive with an alternative (higher interest rates) suddenly available.

However, the more important metric to watch is real rates, defined as the three-month treasury bill minus the current inflation rate. When real rates are in negative territory, gold tends to perform its best, given that there is a cost to not owning gold.

Real Rates

Source: Real Rates, YCharts.com, Author's Chart

Despite the recent rate hikes, this key indicator continues to sit deep in negative territory, hovering near (-) 7.00%. This means that even if investors are getting a better interest rate, it's being eaten away by inflation, it's which is likely to remain above 5.0%.

So, why gold miners? Gold producers mine and process gold for those unfamiliar, and they provide significant leverage to the gold price. Historically, owning them over the metal hasn't made much sense, given that they didn't pay dividends and had much higher beta to the gold price, and lacked growth.

However, for once in a decade, many of the best producers have low debt, are paying 3.5% plus dividend yields, and have growth. This makes them far more attractive than the gold price, getting leverage on the metal while being paid to wait.

Let's look at three names that stand out from a quality standpoint.

Agnico Eagle (AEM)

Agnico Eagle (AEM) is the third-largest gold producer globally, on track to produce 3.3 million ounces of gold in 2022 at all-in sustaining costs [AISC] below $1,030/oz. This makes it one of the highest-margin producers and the lowest-risk, given that it operates in the safest jurisdictions globally with 11+ mines.

Notably, AEM recently added two ultra-high-grade mines to its portfolio and the largest gold mine in Canada: Detour Lake. The company did this by merging with one of the best growth stories in the sector, Kirkland Lake Gold.

In most circumstances, I would avoid a large producer like Agnico Eagle, but the company has one key differentiator from its peers after its recent merger, which is growth.

To date, the company has not given any firm targets or long-term production guidance, but given the company's solid pipeline, which leverages existing infrastructure, I see a path to annual production of 4.3 million ounces of gold by 2029. This would represent 30% growth from current levels, 2500 basis points higher than its peer group of multi-million-ounce producers.

While most gold producers will rely on the gold price to increase earnings and free cash flow looking out over the next six years, AEM will not. Despite this growth, the company trades at its largest discount to net asset value in years, with
what I believe to be a fair value of $78.00 per share.

So, with the stock hovering below the $48.00 level, AEM is my favorite way to get gold exposure currently, especially with a 3.4% dividend yield.

Royal Gold (RGLD)

Another name that recently moved onto the sale rack is Royal Gold (RGLD), the third-largest precious metals gold/streaming and royalty company.

Unlike Agnico Eagle, Royal Gold makes an upfront payment to gold developers and producers, and in exchange, it receives a portion of the production over the project's life. This protects the company from inflationary pressures, which is essential at a time of rising costs like we're seeing currently.

Royal Gold reported attributable production volume of 88,500 gold-equivalent ounces [GEOs] in Q1 and is on track for up to 340,000 GEOs this year.

However, with a solid organic growth pipeline, there is a meaningful upside to this outlook over the next few years, with the potential for 410,000+ GEOs per annum, which is a change from the past few years when the company was in its investment phase and lacked growth.

Despite this attractive growth outlook and 80% plus margins, Royal Gold currently trades at just 25x FY2023 earnings estimates vs. its historical earnings multiple of 50x earnings (20-year average). Even using a more conservative multiple of 38x earnings, which is easily justifiable for a company with 80% margins and recurring revenue, I see a fair value of $162.20. So, with the stock currently sitting below $108.00, this looks like an attractive buying opportunity.

Karora Resources (KRRGF)

Karora Resources (KRRGF) is the riskiest name on the list, sporting a market cap of barely $400 million and being a sub-150,000-ounce gold producer in Australia. However, it also has the most upside by a wide margin and looks very attractive for a small bet.

The reason is that it boasts one of the most impressive organic growth profiles, on track to increase production from 120,000 ounces in 2022 to 220,000 ounces by 2026. The company expects to achieve this by adding a second decline at its Beta Hunt Mine and using additional processing capacity from a recent mill purchase north of the mine.

Like AEM, this will allow Karora to grow earnings and free cash flow meaningfully regardless of the gold price, with any gold price upside being a bonus. So, with the stock trading at less than 1.3x FY2025 revenue estimates, this pullback below US$2.60 looks like a gift.

Final Thoughts

The gold producers are a high-risk area of the market, but once every couple of years, there's a fat pitch, and they get sold down to levels where they trade at massive discounts to fair value.

After the most recent decline in the GDX, we have reached this period, and I see the potential for a 25% plus upside over the next 9 months in the sector while collecting a 3.0%+ dividend yield in names like AEM. Hence, I see AEM, RGLD, and KRRGF as attractive ways to diversify one's portfolio.

Disclosure: I am long AEM

Taylor Dart
INO.com Contributor

Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.