For the past nine years, the stock market has been practically unstoppable, which has meant that industries traditionally ruled by emotions and fear haven’t fared as well. Among those are precious metals, such as gold.
Since hitting an all-time high of over $1,900 an ounce in 2011, gold has mostly struggled to regain its luster. The precious yellow metal suffered through a multiyear downtrend through 2015, and it only recently logged its longest consistent closing streak above $1,300 per ounce — albeit a stronger dollar of late has pushed gold near its 2018 lows.
Gold stocks may be getting ready to shine
However, gold stocks haven’t been sitting idly by as gold has lagged the broader market. After owning up to their overzealous expansion and acquisition spree of the early decade, gold miners have been fervently cutting costs by only focusing on projects with the highest ore grades, and minimizing exploration to only the most promising assets. The last five years have been all about paying down debt and aligning their operations to thrive in an environment where gold prices are considerably tamer. The result is an industry that could be considered a bargain today — at least based on future cash flow per share.
While earnings per share is the traditional measure of a company’s success (and who doesn’t like a healthy bottom-line profit?), my personal preference when analyzing and comparing gold stocks is to examine current or future cash flow per share. Though it’s not a perfect metric — for example, it tells me nothing about a company’s debt or future cash flow potential — it does offer insight into the amount of cash a company’s operations are generating. This cash flow is critical to paying any interest expenses on debt, as well as to covering exploration and existing mine maintenance costs. In my view, cash flow per share is the heart and soul of the gold-mining industry.
Having been a bit of a gold stock maven for years, I’ve come to the determination that a price-to-cash flow per share of about 10 is considered fair. Any gold stock trading at more than 10 times its future cash flow per share is potentially pricey, while gold stocks well below 10 times next year’s cash flow per share could be a bargain.
Cheap gold stocks worth a look
With this in mind, here are a handful of gold stocks that look to be screaming bargains based on their future cash flow per share.
Kinross Gold: 4.2 times next year’s cash flow per share
Though it’s had a bit of tainted past, Kinross Gold (NYSE: KGC) might finally be ready to shake off its rust. Kinross Gold’s issues derive from its acquisition of Red Back Mining, which owned the Mauritania-based Tasiast mine, for more than $7 billion in 2010. Essentially, Kinross acquired this mine at the peak of the gold-price craze. The end result was Kinross writing down about 80% of the value of the deal, as well as delaying the build-out of this prized mine.
However, times are a-changing for Kinross, and a cluster of new projects are set to come online in the coming few years. In particular, the Tasiast phase one project remains on track for completion by the end of this month. Once finished, Tasiast will have boosted its throughput capacity to 12,000 tons per day. In doing so, Tasiast’s output should grow by about 60% to 400,000 ounces of gold production annually, relative to the approximately 250,000 ounces per year it’s currently generating.
Kinross also has plans to complete a massive phase two expansion at Tasiast that could practically double its annual production from where it’ll soon be and crank up its throughput capacity to 30,000 tons per day. Such planning is still in the very early stages, but by the mid-2020s, Kinross could see a major uptick in annual gold production.
More importantly, with Tasiast’s expansion imminent, as well as other projects remaining on track and within budget — e.g., Round Mountain Phase W and the Bald Mountain Vantage Complex — Kinross should see its all-in sustaining costs on a gold equivalent ounce basis fall over time. This means even more in cash flow for Kinross as time goes on. While I understand the leeriness of Wall Street to trust in Kinross Gold’s management team, this has all the signs of a long-term turnaround in the making.
Yamana Gold: 4.3 times next year’s cash flow per share
Similar to Kinross, Toronto-based Yamana Gold (NYSE: AUY) was a bit overzealous with its early-decade mine expansion, and even some of its mid-decade acquisitions. It wound up taking on quite a bit of debt and has been spending the last couple of years modestly paring down its debt levels to more manageable levels. However, the company now looks poised to benefit from bringing a number of new mines online in the years to come.
In addition to organic expansion at the company’s Chapada and Canadian Malartic mines — Canadian Malartic is jointly owned with Agnico-Eagle Mines — Yamana is leaning on a number of new projects to do the heavy intermediate-term lifting. One such asset is the Cerro Moro mine, which entered commercial production in April of this year. Yamana anticipates that Cerro Moro will produce 85,000 ounces of gold and 3.75 million ounces of silver in 2018, with an average (full) year expected to generate 130,000 ounces of gold and 7 million ounces of silver.
The Suruca development within Aurora’s prized Chapada mine is also expected to add icing onto the cake, so to speak. Beginning in 2019, the Suruca development could add 45,000 ounces of gold to 60,000 ounces of gold for up to a five-year period. These projects have been pivotal in pushing Yamana Gold’s mineral resource estimates higher.
Because of Yamana’s silver and copper production, its byproduct-included all-in sustaining costs are lower than the industry average. When coupled with a well-below-average multiple of 4.3 times next year’s cash flow per share, Yamana Gold appears to offer excellent value.
Goldcorp: 6.7 times next year’s cash flow per share
A third and final gold stock that appears to offer exceptional value is Goldcorp (NYSE: GG). Like the other gold miners listed above, Goldcorp’s debt became a source of concern as gold prices declined into 2015, but the company has made modest headway on reducing its debt over the last two-plus years. With a number of projects and cost-cutting initiatives ongoing, Goldcorp is beginning to look like a great deal.
Key to Goldcorp’s success is what it refers to as its “20/20/20 strategy.” This entails the company growing its production by 20%, reducing its all-in sustaining costs by 20%, and increasing its asset reserves by 20%, all by 2020. In terms of growth, the company is continuing to ramp up its Cerro Negro and Eleonore mines, while nearing completion on its Pyrite Leach project at Penasquito. Notably, this latter project is ahead of schedule, with other developments at Musselwhite and Borden coming in at or below cost.
This is a good time to point out that Goldcorp has traditionally leaned on byproduct production to help lower its all-in sustaining costs. By also ramping up Cerro Negro and Eleonore, and improving the production efficiency at existing mines, it should be able to push its all-in sustaining costs to perhaps $700 per gold ounce by 2020. In fact, after initially targeting $250 million in annual efficiency savings, the company believes this figure could be too conservative.
The bottom line with Goldcorp is that it’s always been at or near the top of the pack in terms of low production costs. With steady production growth and cost-cutting forecast through 2020, it’s not out of the question that Goldcorp could outperform the broader market.
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