It’s been a volatile couple of months for the Gold Miners Index (GDX) as an 11% correction in the price of gold (GLD) has seen the basket of gold producers fall by nearly 25% from their August 5th highs. Not surprisingly, this has left many investors wondering whether this bull market is on shaky footing and if this was merely a 2016-style rally that will soon morph into a steep downtrend.
While the current rally has certainly mirrored the 2016 bull move with the 2-year rate of change for the GDX heading above 100%, the difference this time around is that nearly every producer is profitable, and gold has made new all-time highs. In addition, the average million-ounce gold producer is paying a dividend yield that’s now approaching that of the S&P-500, suggesting these companies are more than confident than ever in their cash flows and balance sheet.
So, which miners are the best ones to park in one’s portfolio after this violent correction? Let’s take a look:
The Gold Miners Index is one way to play the gold price, and it can be a good choice for very conservative investors as there is no company-specific risk. However, the GDX tends to significantly underperform in terms of upside vs. the most well-run miners in the sector, with Kirkland Lake Gold (KL) being a good example. From 2017 to 2019, the GDX gained 8%, while sector leader KL gained over 430%. Currently, three names that stand out as potential new sector leaders are Agnico Eagle (AEM), and Alamos Gold (AGI), with the most attractive royalty company in the sector also going on sale during the sharp pullback in the GDX. We’ll examine all three names in a bit more detail below:
Beginning with Franco Nevada Gold (FNV), the stock is not your typical “miner”, as the company makes money from both royalty and streaming deals by financing other miners in the sector so they can develop their projects.
This allows Franco Nevada to avoid most project-related risk such as pit-wall failures or seismic events, and it also means that Franco Nevada doesn’t have to worry about forking over several million in sustaining capital for up-keep on operating mines each quarter. Given that the company doesn’t need to continuously spend on exploration and sustaining capital, its margins are incredible, sitting above 3000 basis points above the highest-margin producers in the sector. In fact, if not for the “Gold” in the company’s names, one might think Franco Nevada was a SaaS company gives its consistent 80% plus margins.
(Source: YCharts.com, Author’s Chart)
In the most recently reported quarter, Franco Nevada saw a 1% increase in gold sales year-over-year and a nearly 20% increase in the gold price. This allowed the company to generate record revenue of $279.8 million, and the company remains on track to meet its FY2020 sales guidance of 495,000 gold-equivalent ounces despite COVID-19 related mine disruptions in Q2. Based on the higher margins and record revenue, the company’s earnings trend continues to improve, with FNV on track for 32% earnings growth this year, even after lapping a year of 57% growth in FY2019.
While it might seem crazy to pay more than 50x FY2021 earnings for a miner, it’s worth noting that FNV is not a traditional miner given its industry-leading margins, so it always trades at a much higher valuation than its peers. Given the company’s consistent double-digit earnings growth and a strong likelihood of a dividend increase next year, I see the stock as a staple for a precious metals portfolio.
Moving over to the second miner on the list, Agnico Eagle is one of the largest gold producers worldwide and one of the only large-scale miners with more than 70% of its production coming from Tier-1 jurisdictions. The company currently operates out of Finland, Mexico, and Canada and just reported an exceptional quarter with gold production coming in just below record highs at 493,000 ounces. Given the improved cash-flow in the quarter, the company raised its dividend by 75% to $1.40 per share annually, giving the company a forward yield of over 1.70% at current prices.
(Source: YCharts.com, Author’s Chart)
Generally, when it comes to mid-yield names with 1.50% – 2.50% yields, the high-yield is offset by sluggish growth. However, in AEM’s case, this is not what we’re seeing at all. In fact, AEM is on track to report triple-digit earnings growth this year, with FY2020 annual EPS estimates sitting at $2.02 (FY2019: $0.96).
Meanwhile, FY2021 annual EPS estimates are sitting at $4.08, which would mark two consecutive years of triple-digit annual EPS growth if met. You rarely find a company in the top-150 growth stocks in the US Market that’s also sporting a yield in line with the S&P-500 (1.75%), which makes AEM a must-hold for investors. For investors looking to get in the stock, I would expect any weakness below $76.00 to be a low-risk buying opportunity.
The last name on the list is Alamos Gold, a small-cap producer with a massive organic growth pipeline. The company recently reported earnings and had a solid quarter with gold production of 117,100~ ounces, despite a brief shutdown to complete development at its flagship Young-Davidson Mine. With development now complete, AGI is set up for a strong Q4 as Young-Davidson production should increase materially with the mill no longer shut down to complete the Lower Mine Expansion.
Meanwhile, the company’s high-grade Island Gold Mine had an exceptional quarter, with industry-leading all-in sustaining costs of $575/oz, translating to nearly 70% margins at a $1,850/oz gold price. This impressive quarter has improved the company’s balance sheet to $170 million in net cash, giving AGI ample room to focus on its development projects in the pipeline.
(Source: Company News Release)
Based on the impressive Q3 results, AGI is on track to grow annual EPS by 95% this year, with current estimates sitting at $0.21. Meanwhile, FY2021 estimates have soared to $0.76, suggesting that the company could grow earnings by strong double-digit levels next year as well. It’s worth noting that the company just came off a year of 320% growth, so even single-digit growth vs. this tough year-over-year comp would be outstanding.
While the recent 30% pullback has undoubtedly been violent, I believe it’s created an opportunity as AGI is now trading at less than 13x FY2021 earnings despite being a top-150 growth stock on the US Market. Therefore, any weakness over the next few weeks should be a buying opportunity.
(Source: YCharts.com, Author’s Chart)
While some weak hands have proclaimed the gold bull market as under pressure and sold off their mining positions, I believe that any further weakness in the miners will be a buying opportunity. Therefore, I believe investors should keep these three names at the top of their shopping lists if we do see some volatility in the back of November.
All three of these miners offer 0.75% plus yields and exceptional growth, and I only expect these yields to grow if gold stays above $1,750/oz.
Disclosure: I am long KL
Disclaimer: 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 on this writing.
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AGI shares were trading at $9.94 per share on Thursday morning, up $0.76 (+8.28%). Year-to-date, AGI has gained 66.32%, versus a 10.66% rise in the benchmark S&P 500 index during the same period.
About the Author: Taylor Dart
Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...
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