It’s been a strong start to Q2 for the Gold Miners Index (GDX) with the ETF up 21% in less than two months, enjoying a violent rally off after its 8-month correction. This strong rally can be partially attributed to a new multi-year high in inflation of 4.2%, which pushed real rates to a reading of (-) 4%, putting a relentless bid under the gold (GLD) price. While this sharp rally has left quite a few miners close to fully valued, there are still several miners trading at a deep discount to peers with the potential for more than 50% upside over the next 12 months. In this update, we’ll look at two miners still trading at dirt-cheap valuations, and a leading silver producer, which is a name to keep on one’s radar if we do see some turbulence later this quarter.

(Source: TC2000.com)

Kirkland Lake Gold (KL), Hecla Mining (HL), and Eldorado Gold (EGO) have little in common, with the first being a high-margin senior gold producer, the second being a high-margin silver producer, and the latter being a mid-tier gold producer with a very bright future. However, all three are special for their own reasons, with one having the sector’s best margins, Hecla having the best jurisdictional profile among its producers, and Eldorado Gold sitting on a transformative asset that makes it an asymmetric reward to risk bet. Let’s take a closer look at the three companies below:

Beginning with Eldorado Gold, the company recently released its Q1 results and reported gold production in line with FY2021 guidance at ~111,000 ounces vs. guidance of ~445,000 ounces on an annual basis. While costs were up in the period, the company’s Lamaque Mine in Quebec continues to perform well and is working towards ramping up to nearly ~190,000 ounces per year by FY2024, up from ~140,000 ounces per annum currently. Production was down slightly year-over-year in Q1, but Eldorado still posted higher revenue, driven by a nearly 10% increase in the average realized gold price on a year-over-year basis. The biggest news was the approval of a dry stack tailings permit at its development-stage Skouries Project, and the project finally making some progress after years stuck in a rut.

(Source: YCharts.com, Author’s Chart)

If we look at the above chart of annual EPS, there’s little to like about EGO, with FY2021, FY2022, and FY2023 annual EPS expected to come in lower than FY20202. This is due to lower production at the company’s flagship Kisladag asset in Turkey, which is offsetting higher production from Lamaque and Olympias, the company’s two smaller mines. However, while Eldorado doesn’t look overly cheap at more than 15x FY2022 annual EPS estimates ($0.76), these results don’t reflect what the company could look like if its Greek development project heads into production. Based on a 2018 study, Skouries has the potential to produce more than 250,000 gold-equivalent ounces per year at all-in sustaining costs below $100/oz based on copper by-product credits, which would push Eldorado’s annual EPS to above $1.60 by FY2025 even at current gold prices.

It’s important to note that the project is not yet approved, but it is a game-changer for EGO, given that it would revamp the company’s margin profile. The fact that the company has finally made headway to get it closer to production and come to agreements with the Greek government is a plus, and if approved for construction, this would lead to a re-rating in the stock later this year. So, while EGO is nothing special and has mediocre upside without Skouries, it has a massive bonus upside case if Skouries does end up being developed. With work progressing at a quick pace, it looks like the project could be approved, translating to a fair value closer to US$16.00 for EGO. This would translate to more than 40% upside from current levels.

(Source: YCharts.com, Author’s Chart)

Moving over to Hecla Mining, the stock has had an incredible run and is now trading at more than 25x earnings at a share price of $7.30. This is a very expensive valuation, even for a Tier-1 silver producer, but the company is in the position of being the only silver producer with multiple assets operating out of strictly Tier-1 jurisdictions. The distinction makes the company much more attractive than its peers, with most of its peers operating out of Mexico, South America, or China. The company just came off a massive quarter with ~3.46 million ounces of silver produced at $7.21/oz, translating to more than 70% margins at spot silver prices. If we assume a fair earnings multiple of 20 and FY2022 annual EPS of $0.29, the stock is still valued richly, with fair value sitting closer to $6.00.

Having said that, the FY2022 annual EPS estimates look conservative at this point, and we could see HL report up to $0.35 in annual EPS if this rise in the silver price continues. So, if the stock does cool off and dips below the $6.00 level, this would provide a low-risk buying opportunity, given that it’s one of the most sought-after silver stocks in the space. Unlike the gold sector, there are not many Tier-1 names to choose from, and certainly not any Tier-1 names with industry-leading margins other than Hecla. So, with a distinction as one of the best in the sector, I would expect sharp dips of 20% or more to be bought up, making Hecla a great buy-the-dip candidate.

The last name on the list is Kirkland Lake Gold, arguably the best producer in the gold sector with expected production of ~1.40 million ounces this year at all-in sustaining costs below $825/oz. The company just came off a solid quarter with gold production of more than 302,000 ounces, with the guidance set at 280,000 ounces for Q1. This is setting the company up for a massive beat in FY2021. Like Eldorado Gold, the Kirkland Lake of 2021 understates the true potential vs. what the company could look like in 2024. As discussed on the conference call, the company is working on a major upgrade to throughput capacity at its Detour Lake Mine to 32 million tonnes per annum and plans to get to 28 million tonnes per annum (23 million currently) as quickly as possible. This should push annual gold production at Detour up from ~550,000 ounces in FY2020 to between 850,000 to 900,000 ounces by FY2025, or 50% growth. This will drive unit costs down to below $775/oz, from $1,100/oz currently. So, while the company is on track to deliver annual EPS of $3.67 in FY2021, the real potential is for more than $4.90 in FY2024, especially if the company keeps up its aggressive buyback program.

(Source: YCharts.com, Author’s Chart)

Despite industry-leading margins, KL is valued at just 10.8x FY2022 earnings estimates ($3.98), and it’s worth noting that the company is sitting on more than $3.00 in cash and no debt. So, on an adjusted for cash basis, the stock is valued at barely 10x next year’s earnings, with the potential to increase annual EPS by more than 40% between FY2020 and FY2024 ($4.90 vs. $3.38). This is a dirt-cheap valuation for a high-margin producer operating out of the safest jurisdictions globally. Even if we use a conservative earnings multiple of 15 for FY2022, this translates to a fair value of $59.70, or nearly 40% upside from current levels. This assumes the gold price does not make new highs, which would drive FY2022 annual EPS higher.

While some investors might think they’ve missed the boat after a sharp rally in the GDX, I believe there are still some solid bets worth buying on dips. The two most obvious names are KL followed by EGO, with HL being the best play in the silver space. However, in HL’s case, I don’t see a low-risk entry unless the stock pulls back substantially. I continue to remain long KL with the stock being one of my largest positions, and I may look to start a position in EGO if we see further weakness.

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.

KL shares were trading at $43.34 per share on Thursday morning, up $0.22 (+0.51%). Year-to-date, KL has gained 5.02%, versus a 11.10% 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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