It’s been painful several months for investors in the Gold Miners (GDX) as they’ve watched nearly every major asset class soar while most gold producers have struggled even to tread water. This has undoubtedly put a severe dent in sentiment in the sector, but it’s also left many names trading at their most attractive looking valuations since the 2018 lows relative to the gold (GLD) price. In fact, some of the juggernauts in the sector are currently trading at less than 10x FY2021 estimated free cash flow and barely 12x earnings, with these valuations typically being reserved for dying businesses. Unless the gold is set to drop below $1,600/oz, this looks to be a buying opportunity, but the key is hunting down the best names in the sector. In this article, we’ll look at a few stand-out names that offer both long-term growth and valuations that bake in a significant margin of safety.

(Source: Author’s Chart)

Beginning with Alamos Gold (AGI), the company is a producer focused in Tier-1 and Tier-2 jurisdictions, with the majority of its products currently coming from Canada. The company’s two flagship mines are the Young-Davidson and Island Gold Mines in Northern Ontario, with the company’s third mine being Mulatos Mine in Mexico. Since 2016, the company has steadily grown production through acquisition and ramp-ups in operations, but this period of significant capital investment is finally complete. This has allowed the company to focus on optimizing current operations while it uses free cash flow to explore bringing its Lynn Lake Project in Manitoba online and ramping up its Island Gold Mine with a Phase III Expansion to over 235,000 ounces per year (135,000~ ounces currently). Assuming the company is successful in this goal, it could grow production by up to 80% in the next five years. In a sector where even single-digit production growth out to FY2025 is rare, this is quite impressive.

(Source: YCharts.com, Author’s Chart)

Despite Alamos’ solid organic growth profile, the company has dropped to a valuation of barely 11x FY2021 earnings estimates, trading at a share price of $8.30. This is a very attractive valuation for a company set to grow annual earnings per share [EPS] by nearly 100% next year ($0.76 vs. $0.41), and a company set to report $0.76 in annual EPS. In fact, if we subtract out the company’s net cash position of nearly $0.20, the company is trading at barely 10x FY2021 earnings. While this dirt-cheap valuation does not preclude further weakness with many miners tied to the gold price, I believe any dips below $8.20 would provide a very low-risk buying opportunity.

(Source: Author’s Chart)

Moving over to the second name on the list, Yamana Gold (AUY), the company also has a solid organic growth profile with its Jacobina Mine in Brazil set to ramp up in FY2023. This should translate to lower costs at the mine and a 25% higher production profile, which should help push the company’s production profile from 950,000 gold-equivalent ounces [GEO] per year to 1.05 million GEOs.

However, the most exciting recent development is the company’s acquisition of Monarch Gold, which has given Yamana control of the Wasamac Project in Canada. This mine has the potential to produce over 200,000 ounces of gold per year at industry-leading costs below $750/oz, which should provide a huge boost to Yamana’s production long-term. While it will take a few years for development and to confirm a construction decision, we could see Wasamac start contributing by FY2024, which would push annual production to above 1.2 million GEOs by FY2025 when it’s fully ramped-up. As noted earlier, the million-ounce producer space is filled with low-growth companies, so Yamana’s growth profile is quite enviable.

(Source: YCharts.com, Author’s Chart)

From a financial standpoint, Yamana has seen a massive improvement in its business with trailing-twelve-month free cash flow surging from (-) $100~ million in Q1 2019 to nearly $400 million last quarter. This has left the company trading at a very reasonable valuation of 14x estimated FY2020 free-cash-flow and less than 11x estimated FY2021 free cash flow. It’s also worth noting that the company pays a 2% dividend yield at current prices, which is well above that of its peers. Based on Yamana’s organic growth pipeline and the fact that it should grow free cash flow by over 20% next year, I would view any pullbacks below $5.05 as low-risk buying opportunities.

The last name on the list is Kirkland Lake Gold (KL), which used to be the sector leader before sentiment turned sour on the stock following its 2019 acquisition of Detour Gold. This acquisition turned out to be brilliant as the company used shares that were arguably overinflated to buy out Canada’s 2nd largest gold producer. This has allowed the company to grow production by over 30% year-over-year. Unfortunately, the company is likely to see a decrease in its gold reserves at its flagship Fosterville Mine in Australia, and this has led to selling pressure because this is KL’s most profitable mine. However, while there is uncertainty surrounding Fosterville, its Macassa and Detour Lake mines are set to increase gold production by over 250,000 ounces cumulatively over the next 24 months. This will pick up most of the slack from Fosterville, assuming the worst, that the mine must operate at 300,000 ounces per year vs. 600,000 ounces per year previously.

(Source: YCharts.com, Author’s Chart)

Given this poor sentiment around the stock and uncertainty, the stock is trading at less than 10x earnings at $40.50, with FY2021 annual EPS estimates sitting at $4.06. It’s worth noting that the company has over $850 million in net cash, or roughly $3.20~ per share, so the stock is actually trading closer to 9x earnings after cash. This not only makes the valuation more appealing, but it also suggests that Kirkland Lake can afford to spend hundreds of millions drilling its properties and completing its expansion projects without any share dilution. While the worst case of lower production long-term at Fosterville looms, it’s worth noting that any upside surprise at Fosterville would be a game-changer for Kirkland Lake, as the stock is now surprised like it’s going offline in five years. For this reason, I see Kirkland Lake as a steal at current levels, and I see the fair value of KL more than 45% higher.

While it’s never easy to buy when there’s blood in the streets, I would argue that a few names in the sector are now approaching very attractive valuations. Based on the recent correction, I see KL as a Strong Buy at current levels and AUY and AGI as buys if the weakness in the sector continues and pushes them below $5.00 and $8.20, respectively. As noted earlier, dirt-cheap valuations do not preclude further weakness. Still, the best time to buy is no one wants profitable companies, and these profitable companies are trading at their most compelling valuations in years.

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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GLD shares were trading at $172.84 per share on Thursday morning, down $0.53 (-0.31%). Year-to-date, GLD has declined -3.09%, versus a 1.89% 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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