Three Miners To Buy On Dips

It’s been a volatile year thus far for the precious metals, and fortunately, for the bulls, the volatility is finally showing up to the upside. However, despite the Gold Miners Index (GDX) being more than 13% off its March lows, there are still several reasonably valued names in the sector, so sharp dips should provide buying opportunities. Below, we’ll look at three names that remain at deep discounts to their peer group and that have significant upside, even if gold (GLD) remains below $1,800/oz.

Barrick Gold (GOLD), Kirkland Lake Gold (KL), and Harmony Gold (HMY) have little in common with significantly different market caps, margins, and jurisdictions, but all of them share one key trait: they’re trading at double-digit free cash flow yields while paying dividends. Generally, buying at 10%+ free cash flow yields while being paid to wait makes for an excellent investment thesis, as long as the company is well-run, has attractive margins, and isn’t heavily indebted. In the case of these three stocks, they meet all three criteria, with Kirkland Lake Gold being the standout of the bunch.

Beginning with Kirkland Lake Gold, the company just came off a strong first quarter with over ~300,000 ounces of gold produced thanks to a solid performance from its new Detour Lake Mine. Despite the fact that Q1 is expected to be the lowest grade of the quarter, KL managed to generate $0.60 in annual EPS and more than $40MM in free cash flow, which pushed the company’s trailing twelve-month free cash flow to more than ~$640MM.  While this translates to only a 7 % free cash flow yield based on KL’s enterprise value of $8.8BB, it’s important to note that FY2021 should be a massive year for the company, with a projected free cash flow figure of closer to $1BB. Therefore, the Q1 figure is less relevant, given that Q1 made up barely 20% of the company’s expected FY2021 gold production.

(Source: Company Filings, Author’s Chart)

Based on $1BB in expected free cash flow and an enterprise value of $8.8BB, KL has a free cash flow yield above 11%, pays a dividend of nearly $0.75 per share, and trades at barely 10x FY2021 annual EPS estimates of $3.70. This is an incredible valuation for a company that has the lowest costs in the industry with projected all-in sustaining costs of $700/oz. It’s also worth noting that the $1BB in free cash flow assumes that the gold price only averages $1,800/oz or less in FY2021 and does not head higher from current levels. Given inflation expectations that are ticking higher, a beat on this figure is possible, giving valuing a potential free cash flow yield of closer to 12%. KL continues to be my top pick in the sector, and I would view any weakness below $37.00 as a buying opportunity. Based on a fair earnings multiple of 15 and FY2022 annual EPS estimates of $4.00, I see a fair value for the stock above $60.00 per share.

Moving over to Barrick Gold (GOLD), the company is one of the largest gold companies globally, sitting on more than 70MM ounces of gold reserves. The company just reported its Q1 results and posted 9% growth in revenue year-over-year to $2.96BB,  helped by its exposure to copper through three different copper mines. This is a differentiator for Barrick, given that most gold producers focus strictly on gold. During Q1, the company’s copper margins soared to $1.86 per pound in Q1, up from $0.19 per pound in the same quarter last year.

(Source: Company Filings, Author’s Chart)

As shown above, Barrick is a cash-flow machine, generating more than $700MM in free cash flow in Q1, which pushed trailing twelve-month free cash flow to above $3.4BB. Based on Barrick’s enterprise value of $39BB, this leaves the company trading at a 9% free cash flow. However, with more than $4BB in free cash flow expected to be generated this year, Barrick boasts a double-digit free cash flow yield for FY2021. The bonus? Investors are being paid to wait with a quarterly dividend of $0.09 and a special dividend paid out in three tranches of $0.14 during the year. So, if we do see any weakness below $20.50, I would view this as a buying opportunity.

(Source: YCharts.com, Author’s Chart)

The final name on the list is the riskiest, but it also has significant torque to the gold price. Harmony Gold is a mid-cap miner that operates out of Africa in what is considered the worst mining jurisdictions globally. Generally, I would venture far away from Africa for investments, but Harmony made a shrewd acquisition last year, is set to begin reporting positive annual EPS again this year, and has improved its leverage ratio to less than 0.1x EBITDA to net debt. Finally, the company also just paid an interim dividend, giving the stock a forward yield just shy of 2.00%.

Harmony has an inferior track record of safety, a much higher-cost profile than its peers at $1,250/oz vs. an industry average of $1,000/oz, and has a good chunk of South African exposure as well. This makes the stock a high-risk, high-reward bet because it will suffer the most from gold price weakness due to its slim margins. However, at a current share price of $4.80, the stock is trading at less than 7x FY2021 annual EPS estimates, which seems to be pricing in the elevated jurisdictional risk and the company’s much higher cost profile.

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.

GOLD shares were trading at $23.40 per share on Thursday morning, up $1.15 (+5.17%). Year-to-date, GOLD has gained 2.72%, versus a 11.39% 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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