Gold Mining Stocks Outlook: Near-Term Prospects Bright

The Zacks Mining - Gold industry primarily includes companies that are engaged in gold mining. These companies comprise big and small players that extract gold from mines of widely varying types and scale. Notably, gold mining is a long and complex process. Before gold can be extracted, significant exploration and development is required to assess the size of the deposit as well as how to extract and process the ore efficiently, safely and responsibly. On average, it takes between 10-20 years before a gold mine is even ready to produce material that can be refined.

The mining, processing, development and mineral exploration activities are subject to several laws governing prospecting, development, production, taxes, labor standards and environmental regulation in various jurisdictions in which these companies operate.

Let us take a look at the three major themes in the industry:

• The Mining - Gold industry is subject to fluctuations in gold prices which have been affected by a gamut of factors over the past year, including a stronger U.S. dollar, interest rate hikes and US-China trade war apprehensions. On top of this, the gold-mining industry had to contend with escalating production costs including the cost of electricity, wages, water and materials. With no control over gold prices, the industry has to focus on improving sales volumes while being cost-effective at the same time. It also has to concentrate efforts on operating efficiently and lowering debt levels to maintain margins. Nevertheless, the Fed’s dovish stance regarding maintaining interest rates and no hikes in 2019 along with the expectations of resolution of the US– China trade dispute could lead to a slowdown in U.S. dollar appreciation and bolster gold prices.
  

• The merger between Barrick Gold Corporation and Randgold Resources Limited has revived interest in the gold mining industry by triggering expectations of further such consolidation in the space. The merger will create an industry-leading gold company with the highest concentration of tier one gold assets with the lowest total cash cost position among senior gold peers. Notably, mining deals have lost momentum in recent years, with companies forced to cut debt levels and slash capital expenditure owing to lower gold prices. In fact, gold production is anticipated to drop eventually as new discoveries remain scarce, existing resources dwindling and grades declining. These factors are likely to compel miners to resort to adding reserves through acquisitions than digging for new ones which are inherently risky and capital intensive.
  

• Major markets India and China (that roughly account for around 50% of consumer gold demand) will continue to support demand for gold. In the last decade, combined demand for gold from India and China has soared 71%. The expanding middle class in China and India, combined with broader economic growth, will have a significant impact on gold demand. Further, use of gold across energy, healthcare and technology is changing rapidly. Moreover, gold has long been considered as a safe haven investment in times of financial or political uncertainty. Emerging market central banks are turning their attention to gold after years of exposure to the U.S. dollar, and as a natural currency hedge against other reserve currencies. So, there will be an eventual demand-supply imbalance that is likely to aid in bolstering gold prices, which bodes well for the industry in the long haul.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Mining- Gold Industry, which is a 32-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #70, which places it at the top 27% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
 
Our proprietary Heat Map shows that the industry’s rank has remained in the top half over the past seven weeks.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Versus Broader Market

The Mining- Gold Industry has underperformed the S&P 500 Index but fared better than the Basic Material sector in a year’s time. While the stocks in the industry have collectively advanced 1.7%, the S&P 500 has rallied 6.3%. Meanwhile, the sector has declined 7.6% over the period.

One-Year Price Performance

Mining- Gold Industry’s Valuation

On the basis of trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing gold-mining companies, we see that the industry is currently trading at 8.3X compared with the S&P 500’s 11.0X and the Basic Material sector’s trailing 12-month EV/EBITDA of 14.1X. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)

Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)

Over the last five years, the industry has traded as high as 12.0X, as low as 5.7X and at the median of 7.6X.

Bottom Line

The prospects of a dwindling supply looms large on the gold-mining industry. Meanwhile, demand will remain strong with India and China continuing to be the major drivers. Demand for gold is also on the rise from the technology sector. The combination of lower mined gold supply and higher demand along with geopolitical tensions could eventually drive the prices north, which bodes well for gold-miners.

We are presenting one stock with a Zacks Rank #1 (Strong Buy) and three stocks with a Zacks Rank #2 (Buy) that investors may consider betting on. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kirkland Lake Gold Ltd. (KL): This Toronto, Canada-based company is a Zacks Ranked #1 stock. The Zacks Consensus Estimate for earnings for fiscal 2019 has gone up 52% over the past 90 days. The Zacks Consensus Estimate for fiscal 2019 projects year-over-year growth of 47%. The company has delivered average positive earnings surprise of 6.45% over the trailing four quarters.

Price and Consensus: KL

Eldorado Gold Corporation (EGO): This Vancouver, Canada based company carries a Zacks Rank #2. The Zacks Consensus Earnings Estimate for fiscal 2019 indicates year-over-year growth of 165%. Further, the Zacks Consensus Estimate for fiscal 2018 has gone up from a loss per share of 13 cents to earnings of 11 cents over the past 90 days.  The company has delivered average positive earnings surprise of 22.22% over the trailing four quarters.

Price and Consensus: EGO

Osisko Gold Royalties Ltd (OR): This Montreal, Canada company carries a Zacks Rank #2. The company has delivered average positive earnings surprise of 116.67% over the trailing four quarters.

Price and Consensus: OR

Sibanye Gold Limited (SBGL): This Weltevreden Park, South Africa-based company carries a Zacks Rank #2. The Zacks Consensus Estimate for earnings for fiscal 2019 projects year-over-year growth of 275%.

Price and Consensus: SBGL

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Sibanye Gold Limited (SBGL) : Free Stock Analysis Report
 
Osisko Gold Royalties Ltd (OR) : Free Stock Analysis Report
 
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Eldorado Gold Corporation (EGO) : Free Stock Analysis Report
 
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