It’s been a strong start to Q1 for the Gold Miners Index (GDX), and despite some challenges in the latter half of Q1, the majority of gold miners have reported solid earnings results. While the COVID-19 precautionary measures led to some minor losses in productivity, most miners still saw low single-digit gross margin expansion. The beautiful thing about the gold miners currently is that they’re the one group in the market, outside of Enterprise Software stocks that continues to see reliable double-digit earnings growth rates. Therefore, while miners used to act as a hedge against inflation and market turbulence, but typically had sub-par earnings growth, this is not the case this time around. Instead, we’ve got a group that not only acts as an inflation hedge but is also generating strong free-cash-flow, increasing dividends, and providing market-leading earnings growth rates. This suggests that the sector is one to watch closely during corrections, as there are quite a few names in the group that are worth accumulating on dips.

(Source: OceanaGold Company Presentation)

While the larger institutional funds have spent the past year piling into the Generals of the sector with $15 billion-plus market caps like Franco Nevada Gold (FNV), the mid-cap miners have been relatively ignored. This is because it’s more difficult for multi-billion dollar funds to put money to work in $5 billion-dollar names without owning a large chunk of the company. Fortunately, this works out well for average investors as it means it’s easier to find mispriced assets among the smaller capitalization names. When it comes to the mid-cap miners, there are three clear stand-outs among the group, B2Gold (BTG), Yamana Gold (AUY) and Kinross (KGC). All three of these companies have strong earnings growth, improving long-term charts, and continue to increase their dividend yields to remain competitive with the major gold companies on an annualized yield basis. Let’s take a closer look below:

Beginning with B2Gold, the company is a 1-million ounce gold producer that made a massive bet three years ago in Mali that has paid off in spades. The company’s Fekola Mine in Mali, which cost nearly $500 million to build, is churning out cash-flow at current gold prices and produced 165,000 ounces of gold in Q1 alone at all-in sustaining costs below $600/oz. These are incredible margins, and this has contributed to the company’s steady growth in earnings per share, with annual EPS increasing from $0.05 in FY-2017 to $0.25 in FY-2019, a 400% growth rate. Fortunately, there’s more growth ahead for the company as the FY-2019 earnings were based on a $1,500/oz average gold selling price, and we’re currently working with a gold price more than $150/oz higher. Given the company’s consolidated all-in costs below $800/oz, any boost in the gold price is gravy for the company, with the company’s gross margins on track to head near 50% this year. Based on FY-2020 estimates of $0.42, we should see over 65% earnings growth this year. Even better, the company’s technical chart is confirming this fundamental strength with a 10-year breakout to new highs this year.

(Source: YCharts.com, Author’s Chart)

(Source: TC2000.com)

The next company on the list is Kinross Gold, and while the company does have some of its production in less desirable jurisdictions like Brazil, Ghana, and Russia, the company has continued to deliver robust earnings growth, with FY-2019 EPS growing 240%, from $0.10 to $0.34. If we look ahead to FY-2020, annual EPS estimates are currently sitting at $0.49, and are expected to ramp up further to $0.52 in FY-2021. This translates to 44% growth year-over-year and is coming on the back of lapping a 240% growth year in FY-2019. Given that the company is trading below $7.00 per share currently, investors are getting a strong double-digit earnings grower with a 1% plus dividend yield at barely 14x forward earnings. While it’s always wiser to buy on dips and wait for significant corrections to initiate positions in gold miners, one could make the argument that the stock is still relatively cheap on a valuation basis even after this parabolic run off of the mid-March lows. Similar to B2Gold, the long-term chart is gorgeous, with a multi-year breakout occurring last month.

(Source: YCharts.com, Author’s Chart)

(Source: TC2000.com)

Last but not least, we have Yamana Gold, another Tier-2 jurisdiction producer that is seeing strong earnings growth thanks to exceptional results from its Jacobina Mine in Brazil, with 43,000 ounces of gold production in Q1 at all-in sustaining costs of $760/oz. At current gold prices, this translates to gross margins of 50% at Jacobina, and the mine  is expected to ramp up to over 220,000 ounces of gold per year by FY-2022. This should help to bolster the company’s earnings growth, given that the mine is one of the company’s highest-margin projects.

While Yamana Gold may not have the same strong earnings growth that Kinross and B2Gold enjoy, it does have a management team willing to return value to shareholders, with the third consecutive quarter in a row of dividend increases in Q1. The dividend is now up 213% in the past year to $0.0625 per year or a 1.20% yield at current prices. Looking ahead to FY-2020, we can see that earnings growth is expected to grow 37% to $0.18 from $0.13 in FY-2019, a solid figure that’s in line with the industry average. However, it’s FY-2021 that is the most exciting, as earnings are expected to jump 39% to $0.25, even with lapping a double-digit year of earnings growth. While there are certain stocks out there in other sectors with comparable growth metrics, few are boasting a 1.3% yield as well.

(Source: YCharts.com, Author’s Chart)

(Source: TC2000.com)

Given that the Gold Miners Index has run up an astounding 120% over the past 40 days, I am not in a rush to do any buying on gold miners currently, as we’re seeing some froth and complacency creep into the sector. Having said that, the above three names continue to grow their dividends responsibly and offer exceptional growth at a more than reasonable price. Therefore, I believe AUY, BTG, and KGC to be three names worth keeping an eye on going forward, as all of them would be low-risk buying opportunities if we were to see 20% plus pullbacks in their share price. For now, I remain on the sidelines, but I plan to begin stalking these names for new buys if we can see a healthy correction in the sector.

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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KGC shares were trading at $6.96 per share on Friday afternoon, down $0.14 (-1.97%). Year-to-date, KGC has gained 46.84%, versus a -9.09% 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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