It’s been a tough start to the month of June for investors parked in the mining sector, as the group was beaten to a pulp, despite a gold price that has barely flinched. Unfortunately, investors that chased the gold miners (GDX) in May must have forgotten that leverage works both ways on the miners, evidenced by the 25% drop in many gold names with just a 6% correction in the gold (GLD) price. The good news for those that were patient is that we now have many small-caps back near attractive valuations, re-testing their prior base breakouts. Currently, two names in the sector stand out with both reasonable valuations and clear accumulation on their weekly charts. Let’s take a closer look at them below:

(Source: Equinox Gold Company Presentation)

While Equinox Gold (EQX) and Yamana Gold (AUY) don’t share a ton in common other than operating out of some of the same jurisdictions, both names have held up extremely well during this pullback in the GDX. Despite many names crumpling under the sector-wide selling pressure, AUY and EQX have held above their 60-day moving averages, and have seen minimal distribution in their charts. Therefore, these names look to be under accumulation by institutions, which isn’t surprising given their strong earnings growth and margin expansion we’re likely to see in FY-2020.

Beginning with Equinox Gold, the company is an intermediate gold producer based out of the Americas and one of the few gold producers with the potential for 40% plus production growth in the next few years. The first pillar to this growth is the company’s Newcastle Project in the US, which is expected to come online in Q3 2020. While the first phase of growth is relatively modest at 50,000 ounces of gold production per year, the plan is to ramp up nearly 200,000 ounces per year by FY-2023. If we combine Newcastle Phase 2 with the expansion at the Los Filos Mine in Mexico, there’s a clear path to Equinox becoming an 850,000-ounce per year producer by early FY-2024. From the current production profile of 570,000 ounces, this is massive growth, especially when the majority of the sector is expecting single-digit production growth over the next four years. Let’s take a look at the company’s earnings trend below:

(Source: YCharts.com, Author’s Chart)

As we can see from the chart above, Equinox Gold was previously posting net losses per share in FY-2013 through FY-2019 but is expected to post its first year of positive annual earnings per share in FY-2020. This transition to profitability comes from significant operating leverage from the LeaGold merger last year, with current FY-2020 annual EPS estimates sitting at $0.81, a strong first year of profitability for the company. If we look ahead to FY-2021, the company is expected to see massive earnings growth in FY-2021, with annual EPS estimates of $1.39. This would translate to 72% growth year-over-year, a product of higher production and higher margins thanks to the low-cost Newcastle Project expected to come online. Based on the current share price of $10.00, Equinox is trading at just over 7.25x forward earnings, a very attractive valuation for a producer boasting growth of this magnitude. Based on the high growth and outstanding earnings growth Equinox offers investors, I believe any pullbacks below $9.90 would be buying opportunities.

(Source: Equinox Gold Company Presentation)

Moving over to Yamana Gold, the company is a senior gold producer also focused in the Americas, but also half-owner of the massive Canadian Malartic Mine in Quebec. The company was on track to produce 1 million gold-equivalent ounces [GEOs] this year but was forced to revise guidance following shutdowns in Q2. The good news is that this guidance cut has stymied the stocks’ rally, leaving Yamana cheap at 17x FY-2021 earnings with an industry-leading dividend of 1.40% or $0.063 per share annually. Based on the company’s strong earnings growth and improved balance sheet, a further dividend hike is likely by Q1 2021, which should sustain the current yield even with modest share price appreciation. Let’s take a look at the company’s earnings trend below:

(Source: YCharts.com, Author’s Chart)

As we can see from Yamana’s chart of annual EPS, the company saw earnings go relatively nowhere over the past several years, in a range of $0.05 to $0.07 until FY-2017. However, in FY-2018, we saw an earnings breakout as the company’s margins finally improved at $1,300/oz gold, and the company is expected to see strong earnings growth this year finally. FY-2020 annual EPS estimates are currently sitting at $0.20, pointing to 54% growth year-over-year, and FY-2021 estimates are at $0.28. This is quite impressive as the company is expected to nearly double annual EPS in just two years, while the sector is expecting earnings growth of barely 40%. Even better, however, we see margin expansion as well for Yamana:

(Source: YCharts.com, Author’s Chart)

As the above chart shows, Yamana Gold has seen gross margins improve from 49.4% in Q1 2019 to 55.9% in the most recent quarter, a 650 basis point margin expansion in just one year. This margin improvement is likely to continue with the higher gold price, and I would not be surprised to see gross margins remain above 54% going forward, assuming a gold price above $1,675/oz. Therefore, this improvement in earnings is not due to one-off items, but instead due to divesting high-cost assets to focus on high-margin assets like the company’s Jacobina Mine in Brazil. Based on Yamana’s industry-leading earnings growth and attractive dividend, I see the stock as a buy below $4.80.

(Source: Yamana Gold Corporate Presentation)

While many of the larger gold producers are still a little expensive, even after their recent corrections, AUY and EQX both offer growth at a great price. Therefore, regardless of where gold is headed short-term, I see both miners as buys on dips, with Yamana attractive below $4.75, and Equinox attractive below $9.90. If we were to see new highs in the next 15 months for gold, I would not be surprised to see both names 30% higher.

(Disclosure: I am long GLD)

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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AUY shares . Year-to-date, AUY has gained 27.39%, versus a -4.04% 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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