The prospects for the Zacks
Mining – Gold
industry look bright at the moment on the back of improving gold prices. The yellow metal is currently trading at around $1,840 an ounce, riding on the back of the fears regarding the impact of coronavirus variants on the economy, continued inflation and geopolitical tensions.
With gold prices anticipated to gain further on demand-supply imbalance, stocks like
Barrick Gold Corporation
GOLD
,
Gold Fields Limited
GFI
,
AngloGold Ashanti
AU
,
Royal Gold Inc.
RGLD
and
Yamana Gold Inc.
AUY
are well-poised to gain from this uptrend, and on initiatives to increase reserves.
About the Industry
The Zacks Mining – Gold industry comprises companies engaged in extracting gold from mines, which are either underground or open pits. Mining is a long and complex process and requires significant financial resources. It entails exploration to evaluate the deposit’s size followed by assessing ways to extract and process the ore efficiently, safely and responsibly, finally, the development of the mine before the actual mining process. It normally takes 10-20 years for a gold mine to produce material that can be refined. The players in the industry nowadays use a range of sophisticated techniques to extract gold and convert it into doré bars, which is an alloy of gold and silver, alongside other impurities. These are then sent for purification, following which the gold is purchased in the form of bars or coins or used in jewelry or for other purposes.
What’s Shaping the Future of Mining-Gold Industry
Rising Gold Prices
: Rollout of vaccinations, ongoing economic recovery, lack of investment demand and consistent dollar strength impeded gold’s performance last year. Due to these factors, the yellow metal suffered a 3.5% loss in value in 2021 — its first annual loss since 2018. However, gold has been gaining this year and is currently at around $1,840 an ounce, courtesy of inflation concerns and increased safe-haven demand. Gold prices have been supported by annual inflation rates soaring to multi-decade highs across major economies and the Russia-Ukraine situation. Gold is widely considered as a hedge against inflation and market uncertainties. The spread of the Omicron variant has renewed fears that it might derail the ongoing global economic recovery. It has also quelled investors’ appetite for riskier assets, thus lifting bullion’s safe-haven appeal and bringing investors back to gold.
Cost Control & Innovation to Increase Efficiency
: Mining companies are major energy consumers with around 50% of their production costs closely linked to energy prices. Meanwhile, the industry has been facing a shortage of skilled workforce, leading to a spike in wages. Labor-related disputes can be damaging to production and revenues. The industry players are grappling with escalating production costs, including electricity, water and materials, and supply chain issues. Since the industry cannot control gold prices, it focuses on improving sales volume, operating cash flow, and lowering unit net cash costs. The industry participants are opting for alternate energy sources such as solar or wind farms to minimize fuel-price volatility and secure supply. Miners are now committed to cost-reduction strategies and digital innovation to drive operating efficiencies.
India and China to Support Demand
: India and China together account for around 50% of consumer gold demand. Demand for physical gold is seasonally higher, starting in the later part of the year aided by the festival and wedding season in India, followed by the Chinese Lunar Year. Demand in China will remain high as policymakers continue to focus on stimulating domestic consumption with initiatives such as shopping festivals. Meanwhile, retail demand in India is strengthening on improved consumer confidence and pent-up demand.
Impending Demand and Supply Imbalance
: The industry players are currently dealing with depleting resources, declining supply in old mines, and lack of new mines. Due to the 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. On the demand side, the use of gold across energy, healthcare, and technology is on the rise. The yellow metal has long been considered a safe-haven investment in times of financial or political uncertainty. Emerging market central banks are turning their attention to gold. 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 Upbeat 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 40-stock group within the broader Zacks
Basic Materials
Sector, currently carries a Zacks Industry Rank #80, which places it at the top 31% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few Mining – Gold 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 Lags S&P500 & Sector
The Mining-Gold Industry has underperformed the S&P 500 Index and the Basic Material sector in a year’s time. The stocks in the industry have collectively declined 8.2%, against the S&P 500 and the broader sector’s rise of 18.2% and 4.1%, respectively.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month EV/EBITDA, which is a commonly used multiple for valuing gold-mining companies, we see that the industry is currently trading at 5.43X compared with the S&P 500’s 14.78X and the Basic Material sector’s forward 12-month EV/EBITDA of 5.55X. 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 9.40X and as low as 4.63X, with the median being at 6.57X.
5 Mining-Gold Stocks to Keep an Eye On
AngloGold Ashanti:
The company will benefit from its investments to grow reserves and production at lower costs over the medium to long term. It recently completed the acquisition of Corvus Gold in a deal valued at around $370 million. The buyout has combined assets in the world’s top-ranked mining jurisdiction and created a meaningful new production base for AngloGold. This move is in sync with the company’s strategy of growing its reserves, building low-cost production and generating sustainable returns. The acquisition establishes a relatively low-cost and low-risk production base from North Bullfrog in the near term. North Bullfrog is a well-advanced project with the first gold production expected in three to four years. This will mark AngloGold’s first production in North America. The company’s shares have gained 9% over the past three months.
The Zacks Consensus Estimate for earnings for fiscal 2022 has been revised upward by 8% over the past 30 days. The consensus mark indicates year-over-year growth of 8%. The company has a long-term estimated earnings growth of 5.85%. AU sports a Zacks Rank #1 (Strong Buy).
You can see
the complete list of today’s Zacks #1 Rank stocks here
.
Price & Consensus: AU
Gold Fields Limited
: The company will continue to gain from a strategic focus on its portfolio of quality assets in good geographical and political jurisdictions, expanding its Mineral Reserve and Resource base, and focusing on value creation and capital discipline. Despite the heavy spending at Salares Norte, the company continues to generate strong cash flows and lower its debt levels. Its world-class gold project, the Salares Norte project, remains on track despite severe winter weather and ongoing COVID-19 constraints. Production is expected to deliver the first gold by the end of the first quarter of 2023. Average annual production is anticipated at 450,000 ounces of gold equivalent over the first seven years and 355,000 ounces over the life of mine. The South Deep mine, the third-largest gold resource globally, is projected to increase production by 20-30% over the next four years. At Tarkwa, the company’s exploration activities are starting to yield results and future prospects look alluring. Its shares have gained 18% in the past three months.
The Zacks Consensus Estimate for Gold Fields’ current year earnings indicates year-over-year growth of 10%. The estimate has remained stable over the past 30 days. The company has an estimated long-term earnings growth of 20.4%. GFI currently carries a Zacks Rank #2 (Buy).
Price & Consensus: GFI
Barrick Gold
: Its strong liquidity position and healthy cash flow position it well to take advantage of attractive development, exploration, and acquisition opportunities. The company’s growth projects — Turquoise Ridge third shaft, Goldrush and the Pueblo Viejo plant and tailings expansion are currently in execution. These projects are advancing per the schedule and within budget, which underpins the next generation of profitable production from the core region. The company achieved its target of zero net debt at the end of 2020, which is commendable. GOLD recently reported preliminary gold production of 4.44 million ounces for 2021 that came within the company’s guidance of 4.4-4.7 million ounces. With this performance, the company has maintained its streak of meeting annual guidance targets for the third consecutive year. The company’s shares have gained 4% in the past three months.
The Zacks Consensus Estimate for earnings for this Toronto, Canada-based company’s fiscal 2022 indicates year-over-year growth of 2.4%. The estimate has remained stable over the past 30 days. Barrick Gold has a trailing four-quarter earnings surprise of 16%, on average. It currently has a Zacks Rank #3 (Hold) and a long-term estimated earnings growth rate of 2%.
Price & Consensus: GOLD
Royal Gold
: The company’s strong balance sheet, focus on reducing debt levels and healthy cash position enable it to invest in properties with exploration and production upside. Focus on acquiring streams and addition of the high-quality long-life Khoemacau development project will drive growth. The company remains focused on allocating its strong cash flow to dividends, debt reduction and new business. Recently, Royal Gold’s board hiked the annual dividend by 17% to $1.40 per share. This is the largest percentage increase since 2013 and marks the company’s 21st consecutive annual dividend increase. Its shares have risen 6% over the past three months.
The Zacks Consensus Estimate for Royal Gold’sfiscal 2022 earnings indicates year-over-year growth of 12.3%. The estimate has moved up 1% over the past 30 days. RGLD has a trailing four-quarter earnings surprise of 7.3%, on average. The company currently has a Zacks Rank #3 and a long-term estimated earnings growth of 10%.
Price & Consensus: RGLD
Yamana Gold
: The company intends to continue building on this base through expansion and optimization initiatives at existing operating mines, development of new mines, advancement of its exploration properties, and looking for other consolidation opportunities with a primary focus on the Americas. By prudently investing in its exploration project pipeline, the company expects to increase its mineral resource base steadily and generate consistent long-term growth in production and cash flow. It has significantly improved its balance sheet and financial flexibility, and reduced debt levels. Its efforts to lower operating costs are expected to boost margins. The company recently reported record fourth quarter and 2021 production numbers, ahead of its guidance. Jacobina had a record year with a production of 186,206 ounces. Production increased for the eighth consecutive year. It is anticipated to continue in the coming years as a result of the phased expansion strategy and the exploration programs aimed at generating significant value from the remarkable geological upside of the property. The company’s shares have gained 4.3% over the past three months.
The Zacks Consensus Estimate for Yamana Gold’s 2022 earnings has moved up 73% over the past 30 days. The estimate suggests a year-over-year growth of 9.7%. The company has a trailing four-quarter earnings surprise of 15.6%, on average. AUY has a Zacks Rank #3.
Price & Consensus: AUY
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