It’s been a rough start to the year for the Gold Miners Index (GDX), with the industry group down over 9% year-to-date and massively underperforming the major market averages. Not surprisingly, this has put a massive dent in sentiment for the sector, with gold miners the most hated I recall seeing them since Q4 of 2015, a major low for the market. While the March 2020 correction for the GDX was sharp and left investors shell-shocked, it didn’t last, so sentiment did not creep down to the levels we’ve seen recently. The good news is that when an asset class is hated and paying investors to wait for a bottom, it’s time to start nibbling. This article takes a look at a few names trading at reasonable valuations relative to their peers.

(Source: TC2000.com)

I have focused mostly on gold miners in previous updates, but given the silver-squeeze movement, I have added two silver miners that are reasonably priced into focus this week. These two names trade at significant discounts to some of their more well-known peers, with some of the high-flying silver miners currently trading at over 40x earnings. Meanwhile, Alexco Resources (AXU) and Fortuna Silver (FSM) are trading at below 20x earnings, and both should see significant production growth this year.

The final name worth mentioning is a previous leader that’s fallen out of favor, Kirkland Lake Gold (KL), that reported record earnings today and is trading at less than 10x FY2021 free cash flow estimates. Let’s take a look at a few of these companies below:

Beginning with the most undervalued name, Kirkland Lake Gold, the company just released a blow-out report with record annual free-cash-flow, record yearly gold production of 1.37~ million ounces, and incredible all-in sustaining cost margins of more than $900/oz in FY2020.

In Q4 alone, the company’s all-in sustaining cost margins came in at $1,021/oz or 53.5%, and KL expects to keep its costs at $800/oz next year. The report’s major news was that the company had received permit approvals for an expansion from 24 million tonnes per annum per day to 32.8 million tonnes per annum at its Detour Lake processing plant. Assuming just 90% mill capacity at similar grades to what KL has been mining, this would push the asset from a 650,000-ounce per year mine to an 875,000-ounce per year mine by FY2025. This is major news because it more than offsets the decrease in production investors are seeing at its flagship Fosterville Mine with grades dropping off.

(Source: Company Filings, Author’s Chart)

As shown in the chart below, Kirkland Lake’s FY2021 earnings estimates are currently sitting at $3.95, with the stock trading just above $34.00. If we subtract out $3.00~ in net cash, this translates to a PE ratio of less than 8 and one of the lowest P/E ratios in the sector currently.

Meanwhile, investors are also getting an annual dividend of $0.75, or more than a 2.20% yield at current levels. This is a dirt-cheap valuation, and I continue to see fair value closer to $60.00, so I have added to my position on this weakness to bring my average cost closer to US$37.00.

(Source: YCharts.com, Author’s Chart)

Moving over to the next name on the list, Alexco, the company recently began production at its Keno Hill Mine in the Yukon Territories and is making the shift from explorer to producer. Keno Hill is a high-grade silver mine that’s expected to produce more than 4 million ounces of silver per year over an 8-year mine life, with significant growth in annual EPS expected in FY2021. Based on current estimates, the company should generate annual EPS of $0.20 or 900% growth, which leaves the stock trading at barely 15x earnings.

However, these estimates are based on a silver price of $25.00/oz and could easily get to $0.30 with $30.00/oz silver. Assuming this is the case, Alexco is trading at closer to 10x earnings and should start to get noticed once it begins reporting triple-digit earnings growth on a year-over-year basis.

(Source: YCharts.com, Author’s Chart)

The final name on the list is Fortuna Silver, a name has risk because its production comes from less favorable jurisdictions like Mexico and Argentina, but that looks to have most of this jurisdictional risk priced in.

As shown below, Fortuna Silver saw a massive boost in gold production in Q4 with its new Lindero Mine in Argentina coming online, and the company is expected to grow annual gold production to over ~150,000 ounces with Lindero ramping up to full capacity this year. This should translate to significant earnings growth for the stock, given that the company will be producing an additional ~100,000 ounces of gold this year.

(Source: Company Filings, Author’s Chart)

Currently, several large-cap silver producers are trading at closer to 20x earnings, but Fortuna Silver is valued at just 8x FY2021 earnings estimates, at a share price of $7.00. If we look at recent estimates, FSM is expected to increase annual EPS by more than 400% year-over-year, which gives it one of the highest earnings growth rates in the sector currently. Obviously, metals prices are going to need to cooperate to meet these targets, but even if we assume FSM misses and only reports annual EPS of $0.85 in FY2021, it’s still trading at just 8.2x earnings. The key catalyst for the stock will be ramping up its Lindero Mine to full capacity without any hiccups, but if it can succeed and meet production guidance, the stock looks very reasonably valued here at $7.00.

(Source: YCharts.com, Author’s Chart)

The miners are the most hated they’ve been in years, with many of them being given away, and this is a perfect time, in my opinion, to start accumulating in long-term portfolios. I am not looking at price action on a day-to-day or week-to-week basis in long-term portfolios, but instead looking to buy great businesses at reasonable valuations with those businesses paying me to wait.

Currently, the one name that meets this criterion the most is Kirkland Lake Gold, trading at 8x earnings with a more than 2.2% yield despite having industry-leading margins and operating out of the safest jurisdictions globally. For investors interested in silver miners, AXU and FSM look like solid ideas, but I would be sizing them accordingly due to their much smaller market caps, and waiting for pullbacks.

Disclosure: I am long GLD, 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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