Gold Mining Stocks’ Outlook Bright on High Gold Prices

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 28% so far this year and recently surpassed the $2,000 an ounce threshold for the first time. The yellow metal has outperformed other major asset classes this year primarily driven by the coronavirus crisis that fueled apprehensions regarding the global economic growth, which, in turn, sent investors scurrying for safe-haven assets. Gold has also benefited from the ongoing tensions between the United States and China. Moreover, lower interest rates make gold an attractive option for investors holding other currencies. Further, fears of supply crunch with miners halting their operations as per government mandates to stem the coronavirus spread have contributed to the price movement.
   
• The $5.4 billion merger between Barrick Gold Corporation (GOLD) 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 the yellow metal. 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 30-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #65, which places it at the top 26% 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 31%.

Our proprietary Heat Map shows that the industry’s rank has remained in the top half over the past seven weeks.

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 46.4%, the S&P 500 has gained 15.4%. Meanwhile, the sector has gone up 13.3%.

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 7.18X compared with the S&P 500’s 13.47X and the Basic Material sector’s forward 12-month EV/EBITDA of 20.28X. 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 9.48X and as low as 5.03X, with median being at 6.75X.

Bottom Line

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.

We present two stocks with a Zacks Rank #1 (Strong Buy) and three stocks 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.

Galiano Gold Inc. (GAU): The company, which was formerly known as Asanko Gold Inc., changed its name to Galiano Gold Inc. in May 2020. Headquartered in Vancouver, Canada, the company currently sports a Zacks Rank #1. The Zacks Consensus Estimate for current-year earnings indicates year-over-year improvement of 1600%. The estimates have been revised upward by 31% over the past 60 days. The company has a trailing four-quarter earnings surprise of 125%, on average.

Price and Consensus: GAU

Barrick Gold Corporation: The Zacks Consensus Estimate for 2020 earnings for this Toronto, Canada-based company indicates year-over-year improvement of 80%. The estimates have moved north by 10% over the past 30 days. The company has a trailing four-quarter earnings surprise of 23.1%, on average. The company has a long-term estimated earnings growth rate of 2% and a Zacks Rank #1.

Price and Consensus: GOLD

Yamana Gold Inc. (AUY): The Zacks Consensus Estimate for the company’s 2020 earnings has moved up 44% in the past 30 days. The figure suggests year-over-year growth of 77%. The Toronto, Canada-based company has a trailing four-quarter earnings surprise of 81.2%, on average. The company has a long-term estimated earnings growth rate of 18.2%. The company currently carries a Zacks Rank #2.

Price and Consensus: AUY

Pretium Resources Inc. (PVG): The Zacks Consensus Estimate for fiscal 2020 earnings of this Vancouver, Canada-based company suggests growth of 20% from the prior fiscal. The company has a trailing four-quarter earnings surprise of 31.7%, on average. The company has a Zacks Rank 2.

Price and Consensus: PVG

Royal Gold, Inc. (RGLD): The Zacks Consensus Estimate for the current fiscal for this Devnver CO-based company indicates year-over-year growth of 47.4%. The company has a trailing four-quarter earnings surprise of 6.3%, on average. The Zacks Ranked #2 company has a long-term estimated earnings growth rate of 10%.

Price and Consensus: RGLD

 

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Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor. 

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