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Rate Cut Expectations Boost Gold Mining Stocks' Outlook

Madhurima Das

The Zacks Mining - Gold industry primarily comprises big and small companies engaged in gold extraction 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 for a gold mine 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:

  • So far this year, gold prices have gained 11% and are trending above $1,400 an ounce — at levels last seen in 2013. This can primarily be attributed to the yellow metal’s safe haven demand, which has been triggered by uncertainty over the U.S.-China standoff and the U.S.-Iran tension. Gold also continues to benefit on an impending rate cut. Lower interest rates decrease the opportunity cost of holding non-yielding gold and weigh on the dollar, making gold cheaper for investors holding other currencies. Considering that the Mining - Gold industry has to contend with escalating production costs including the cost of electricity, wages, water and materials, rising prices currently bode well for miners. With no control over gold prices, the industry has to focus on improving sales volumes, operating efficiently and lowering debt levels to maintain margins.

  • The merger between Barrick Gold Corporation and Randgold Resources Limited has created an industry-leading gold company with the highest concentration of tier one gold assets and lowest total cash cost position among senior gold peers. Consequently, this deal has triggered expectations of further such consolidation in the space. 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. Gold production is anticipated to drop eventually with new discoveries remaining 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, the yellow metal 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 33-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #18, which places it at the top 7% 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 four 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 outperformed both the S&P 500 Index and the Basic Material sector in a year’s time. While the stocks in the industry have collectively advanced 35.3%, the S&P 500 has rallied 6.7%. Meanwhile, the sector has declined 12.6%.

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One-Year Price Performance


Mining- Gold Industry’s Valuation

On the basis of forward 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 8.7X compared with the S&P 500’s 12.0X and the Basic Material sector’s trailing 12-month EV/EBITDA of 5.9X. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio


Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio


Over the last five years, the industry has traded as high as 9.60X and as low as 4.66X, with median being at 6.7X.

Bottom Line

The prospects of a dwindling supply looms large on the gold-mining industry. Meanwhile, demand will remain strong driven by India and China. 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 three stocks with a Zacks Rank #1 (Strong Buy) and two with a Zacks Rank #2 (Buy) that investors may take a look at. You can see the complete list of today’s Zacks #1 Rank stocks here.

Franco-Nevada Corporation (FNV): This Toronto, Canada-based company is a Zacks Rank #1 stock. The Zacks Consensus Estimate for earnings for fiscal 2019 has gone up 11% over the past 90 days. The Zacks Consensus Estimate for fiscal 2019 projects year-over-year growth of 21.37%. The company has an average positive earnings surprise of 6.38% over the trailing four quarters. The company has a long-term estimated earnings growth rate of 4.00%.

Price and Consensus: FNV


Kirkland Lake Gold Ltd. (KL): This Toronto, Canada-based company also sports a Zacks Rank #1. The Zacks Consensus Estimate for earnings for fiscal 2019 has gone up 12% over the past 90 days. The Zacks Consensus Estimate for fiscal 2019 projects year-over-year growth of 63.97%. The company has an average positive earnings surprise of 4.75% over the trailing four quarters.

Price and Consensus: KL

 

Kinross Gold Corporation (KGC): The Zacks Consensus Estimate for fiscal 2019 earnings this Toronto, Canada-based company has gone up 100% over the past 90 days. The estimate reflects growth of 100% over the prior fiscal. The company has an average positive earnings surprise of 33.33% over the trailing four quarters. The stock sports a Zacks Rank #1.

Price and Consensus: KGC

 

Agnico Eagle Mines Limited (AEM): The Zacks Consensus Estimate for fiscal 2019 earnings for this Toronto, Canada-based company projects year-over-year growth of 147.86%. The Zacks Consensus Estimate for earnings for fiscal 2019 has moved up 31% over the past 90 days. The company has an average positive earnings surprise of 266.67% over the trailing four quarters. The company has a long-term estimated earnings growth rate of 1.00%. The stock carries a Zacks Rank #2.

Price and Consensus: AEM

 

Barrick Gold Corporation (GOLD): This Toronto, Canada-based company carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for fiscal 2019 suggests a year-over-year growth of 25.71%. The company has an average positive earnings surprise of 0.42% over the trailing four quarters. The company has a long-term estimated earnings growth rate of 2.00%.

Price and Consensus: GOLD

 

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Kirkland Lake Gold Ltd. (KL) : Free Stock Analysis Report
 
Kinross Gold Corporation (KGC) : Free Stock Analysis Report
 
Barrick Gold Corporation (GOLD) : Free Stock Analysis Report
 
Franco-Nevada Corporation (FNV) : Free Stock Analysis Report
 
Agnico Eagle Mines Limited (AEM) : Free Stock Analysis Report
 
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