It’s been a turbulent couple of months for the sectors of the precious metals, and the Gold Miners Index (GDX) continues to massive underperform gold, down nearly 25% from its year-to-date highs. However, while the index has been busy correcting, gold miners are reporting their highest profits since 2011, and have hiked their dividend yields to just shy of 10-year highs.

Given that most gold producers are pulling the metal off the ground for less than $1,000/oz and still have massive margins despite the 12% correction in gold (GLD), we could have a buying opportunity on our hands if this weakness continues. However, with over 50 names in the GDX to choose from, it’s not easy to separate the wheat from the chaff. Let’s take a look at which three are stand-outs in the sector currently:

(Source: TC2000.com)

In a market where the S&P-500’s (SPY) dividend yield has dipped to 1.60%, the yield is as important as ever for investors. In fact, the average million-ounce producer now has a dividend yield higher than the S&P-500 for only the second time in the past 10 years. While there’s a ton of growth in the Gold Miners Index currently with the metal up 25% over the past year, there are only a handful of names in the index sporting both high growth and compelling yields. Three of the names are Kirkland Lake Gold (KL), Yamana Gold (AUY), and B2Gold (BTG).

The first two names are both based out of primarily Tier-1 jurisdictions, with more than 60% of their gold production coming from the safest countries to operate out of, while B2Gold is a high-margin producer in less favorable jurisdictions, but makes up for it with its industry-leading yield of 2.75%~. Let’s take a look at the three companies in more detail below:

(Source: Author’s Chart)

Beginning with Yamana Gold, the company is one of the top performers this year, up 36% year-to-date despite its recent decline. As shown below, the company has had a transformative year increasing its annual dividend and bolstering its balance sheet, with the company’s net debt improving from $940 million a year ago to less than $600 million in the most recent quarter, while the company has hiked its annual dividend from $0.04 to $0.11, an increase of almost 200%.

(Source: YCharts.com, Author’s Chart)

Meanwhile, given the company’s exceptional margins due to the rising gold price, we’ve seen a meaningful improvement in AUY’s earnings trend. As shown below, AUY’s earnings trend made little traction between FY2013 and FY2019 but is on track to hit a new multi-year high next year.

As it stands, FY2020 annual earnings per share [EPS] is expected to increase by over 100% ($0.30 vs. $0.13), and FY2021 annual EPS is expected to grow by 50% after lapping a year of triple-digit growth. This is exceptional growth, with very few companies in the market currently offering these kinds of growth metrics. However, the rising dividend yield makes the investment thesis even sweeter, with AUY’s yield currently sitting at 1.93% to complement this growth. While I don’t see the stock as a low-risk buy just yet, I would expect any weakness below $5.00 to be a low-risk buying opportunity.

(Source: YCharts.com, Author’s Chart)

Moving over to B2Gold, the company is currently the lowest-cost million-ounce gold producer in the sector, with all-in sustaining costs tracking below FY2020 guidance of $800/oz, with costs year-to-date coming in at $745/oz. These costs translate to over 60% margins at $1,875/oz gold, and these are margins that many tech companies would salivate over.

While the company has finally completed its expansions at its flagship Fekola Mine with a ramp-up to 7.5 million tonnes per annum complete, the company has hiked its dividend considerably to make investors begin to look at it as a value and growth play.

(Source: B2Gold Company News Release)

As shown in the chart below, BTG also has an enviable earnings trend, with FY2020 annual EPS expected to soar by over 125% this year ($0.50 vs. $0.22). However, FY2021 and FY2022 annual EPS growth are less exciting, with just 11% growth expected over the next two years. Fortunately, the company makes up for this lack of growth with a juicy dividend yield of 2.77% at current prices, which makes the stock one worth considering going forward. While I do not see BTG as a low-risk buy yet either, I do believe that any pullbacks below $5.45 would be a low-risk buying opportunity where the stock would sport a 3.00%+ yield.

(Source: YCharts.com, Author’s Chart)

The final name on the list is Kirkland Lake Gold, and the company just came off a rough Q3 due to heat issues at its underground mine in Canada. This was related to record temperatures in Kirkland Lake, which made it unsafe for employees underground due to a lack of ventilation of the mine. However, this is a non-recurring issue as temperatures have dropped considerably, and KL is already working on improving ventilation at its Macassa Mine by 200% by FY2023 with the sinking of a new shaft at the mine. Unfortunately, perceptions about a low reserve life at its highest-grade mine in Australia (Fosterville) and a weaker quarter operationally have led to a massive decline in the stock.

(Source: YCharts.com, Author’s Chart)

As the chart above shows, though, the stock has one of the most impressive earnings trends in the gold sector. Currently, the company is on track to grow annual earnings per share by 25% year-over-year ($3.39 vs. $2.72) despite a 30% headwind in the share count with the acquisition of Detour Gold earlier this year. For FY2021, annual EPS growth is expected to accelerate by 800 basis points, with annual EPS set to grow by 33% year-over-year ($4.52 vs. $3.39). It’s rare to find any stock with 50% plus margins and double-digit annual EPS growth trading at a P/E ratio of below 9, but in KL’s case, this sell-off has left the stock trading at below 9x FY2021 earnings.

If we subtract out the company’s net cash position of $3.00, this improves to closer to 8x earnings, which is unbelievable for a sector leader. I continue to see the stock as a strong buy for long-term investors, and I see this weakness as the best opportunity in years to get involved in the stock. It’s worth noting that investors are getting a 1.78% annual yield at current prices as well.

(Source: Koyfin.com)

While the S&P-500 continues to push to new all-time highs, the Gold Miners Sector is the most beaten up its been since March, and the dividend yield is actually higher than March given the recent dividend increases across the sector. Therefore, while it’s hard to find value in S&P-500 companies, investors are getting a great opportunity to add some growth names at compelling valuations in the precious metals sector. Some might argue that gold might correct further, but it’s important to note that all three companies have solid dividend coverage and 45% plus margins, so even a $100/oz drop in the gold price does not damage the investment thesis here. While I am not long AUY and BTG yet, I continue to add KL to long-term accounts below $43.00, and I continue to stick with my long-term target price of $64.00 for the stock.

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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KL shares fell $0.29 (-0.71%) in premarket trading Thursday. Year-to-date, KL has declined -6.19%, versus a 12.28% 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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