It’s been a volatile back half of 2020 for the Gold Miners Index (GDX), and unfortunately, the recent Federal Reserve comments on ‘lower for longer’ rates have not done much to buoy the index. While the GDX has bounced from its year-to-date lows and found some support, we haven’t seen a ton of upside follow-through, and many names are still sitting near multi-month lows.

However, while this frustrating price action has put a damper on the holiday season for precious metals investors, it’s worth noting that the sector’s value component is becoming quite attractive. In fact, the average million-ounce gold producer is now paying a higher dividend yield than the S&P-500, and we’re likely to see further dividend raises in Q1 and Q2 of 2021, pushing the industry’s yield closer to 1.75%. Let’s take a look at a few names that might be worth putting on a shopping list below:

(Source: Author’s Chart)

The key to navigating the Gold Miners Index is focusing on the better names when they’ve finally gone on sale, and in the case of Barrick Gold (GOLD), Gold Fields (GFI), and Royal Gold (RGLD), that time is finally approaching. In fact, these three stocks are down an average of over 30% from their year-to-date highs, even though gold is sitting just 10% from its highs. This suggests that these names’ selling pressure is beginning to get excessive, meaning that we’re nearing a low-risk area to start new positions.

Beginning with royalty & streaming company Royal Gold (RGLD), the company just came off a solid quarter with record revenue, and the name is a lower-risk way to play the sector. This is because RGLD finances other miners to help build their projects, and receives recurring payment from production once these projects are built or expanded. In RGLD’s case, this contributes to consistent margins of 70% plus each year, dwarfing the average margins in the sector of closer to 35%. As shown in the chart below, this has contributed to a powerful earnings trend despite a violent bear market in the gold price between 2012 and 2016.

(Source: YCharts.com, Author’s Chart)

If we look at the chart above, we can see that RGLD reported annual EPS growth of over 80% last year ($2.58 vs. $1.43) and is on track to lap that growth with another year of 40% plus growth in FY2021. Despite these impressive growth rates, the company trades at the low end of its historical range for the price to cash-flow, at a current ratio of just 17.0, with this being a dated presentation. This is an extreme discount relative to the peer average of 16.0 to 34.0, and dips to the bottom of this range have typically been buying opportunities.

Assuming a conservative forward P/E ratio of 35 for a high-margin business like RGLD and FY2021 annual EPS of $3.65, I see fair value for the stock closer to $127.00. Therefore, if we were to see a dip below $106.00, I would view this as a low-risk buying opportunity.

(Source: Company Presentation)

Moving over to the next name on the list, Barrick Gold, the company is more well-known due to Warren Buffett’s investment earlier this year. While the Oracle of Omaha trimmed his position in the senior gold miner, the recent selling pressure has pushed GOLD near an attractive valuation, though Barrick’s dividend yield is inferior to its senior gold producer peers. However, with a solid earnings trend in place, and debt continuing to improve, I would expect an increase in the dividend yield next year to closer to 2.0%.

This should close the gap between Barrick and its other peers like Newmont Corporation (NEM). If we were to see GOLD dip below $21.00 heading into Q1, I would view this as a low-risk buying opportunity, with the stock trading at 15x FY2021 annual EPS estimates of $1.39.

(Source: YCharts.com, Author’s Chart)

The final name on the list is Gold Fields (GFI), a name that’s often shunned due to its high exposure to Africa. However, while nearly 50% of the company’s mines operate out of less favorable jurisdictions, this jurisdictional risk is priced into the stock at the right price. With Gold Fields trading at 8x FY2021 annual EPS estimates despite 260% growth in FY2020 ($0.72 vs. $0.20), I would argue that we’re finally at the right price here.

(Source: YCharts.com, Author’s Chart)

Gold Fields is currently constructing a new Tier-1 asset in Chile, Salares Norte, which will not only improve its jurisdictional profile but also massively increase production. Plus, costs at Salares Norte are expected to come in at sub $600/oz, which should lead to margin expansion given that the company’s current cost profile is closer to $950/oz. Therefore, investors are getting organic growth, an improved margin profile for a forward P/E ratio of below 8 at current levels. I see this weakness below $9.50 as a buying opportunity.

(Source: Author’s Chart)

The Gold Miners Index is notorious for grinding down market participants, and several have likely taken tax losses in the space after chasing the miners higher in August. Fortunately, the combination of despondence among investors, robust dividend yields, and attractive valuations for some names has created a low-risk buying opportunity to start positions. The above three names represent some of the discounted names in the sector. For now, I only hold a position in GFI of the three listed stocks, but I may look to add new positions in other names on further weakness.

Disclosure: I am long GLD, GFI, NEM

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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GOLD shares were trading at $22.82 per share on Thursday afternoon, down $0.42 (-1.81%). Year-to-date, GOLD has gained 24.36%, versus a 17.62% 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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