Speculators may have shifted their focus to cryptocurrencies, but many long-term investors still believe gold is the best hedge against economic uncertainty and rising inflation. Here, several leading newsletter advisors, and MoneyShow.com contributors, look at their best ideas among gold miners.
Scott Chan, The Complete Investor
Comebacks are always in style; here we highlight gold sector stocks that struggled last year but are likely to rebound strongly as the industry picks up steam. For several reasons, we expect gold prices to continue to strengthen, possibly by a lot.
The rise in oil and other commodities will spill over into gold, which typically rallies whenever commodities markets are strong. Meanwhile, a slowdown in gold exploration during the years of depressed gold prices suggests global production will be flat or will even decline.
Even if gold just made a push toward $1,400, it would provide a welcome boost to both Barrick Gold (ABX) and NovaGold (NG) . The two companies share a 50:50 stake in the potential world-class Donlin Gold project, where the permitting process has reached the final stages. The two companies could receive full permits by the year's second half.
NovaGold's share price suffered an extra blow from investor concern that to raise money to develop Donlin, the company might need to sell additional equity, diluting the shares.
But NovaGold, which currently has no debt, could borrow instead or sell some of its ownership in Donlin. And higher gold prices would make the economics of Donlin even more appealing, giving NovaGold more options to raise money on favorable terms.
We fully expect NovaGold will find investors willing to finance development of Donlin -- possibly entities with Chinese ties. Barrick's CEO John Thornton has deep roots in China. Both Barrick and NovaGold are good bounce-back candidates.
Michael Murphy, New World Investor
Most likely, gold needs one more retracement before a third -- and successful -- attempt to break $1,356 and reignite the gold bull market. Vancouver-based Sandstorm Gold (SAND) provides financing for precious metal mining companies. Known as a royalty streaming company, Sandstorm earns a percentage of gold product in exchange for upfront financing.
The stock sold off 10% after its latest earnings report, booked $15.4 million in revenues, had $9.9 million in operating cash flow, and reported break-even earnings per share. There were a number of one-time credits and charges. They repeated their forecast for 50,000 to 60,000 ounces of gold equivalent production in 2018, growing to 125,000 ounces in 2022.
I think investors over-reacted to the one-time issues like foreign exchange fluctuations and non-cash impairment charges. They also don't like the share dilution that is necessary because SAND is in a rapid growth phase.
On the conference call, management pointed out that 2017 was a record year for both total attributable gold equivalent ounces sold (over 54,000 ounces) and revenues (over $68 million). They acquired another 39 royalties, bringing the total to 174 streams and royalties.
The most recent acquisition is a 2% net smelter royalty on Endeavour's Hounde mine in Burkina Faso. This royalty was purchased for $45 million and based on Endeavour's guidance, Sandstorm's 2% of revenue should be about $6 million in 2018.
Because they paid for the acquisition with a combination of $10 million in cash on hand and $35 million from the revolving debt facility, the acquisition will be materially accretive to cash flow per share because they didn't issue any shares to do the acquisition.
As for the debt, because of the sale of Equinox securities as well as strong cash flow so far this year, they already repaid the debt down to $7.5 million and expect it to be paid to zero and start rebuilding their cash position by next quarter.
In only a couple of months, the new $150 million revolving debt facility will be totally undrawn and can be used for future acquisitions. This is the kind of management we want shepherding our investment!
CEO Nolan Watson said: "I really do believe that for the first time in nearly a decade, we're in a win-win situation for gold. Yes, there will be lots of volatility, including volatility in the gold price, but with a strong balance sheet and low fixed operating costs, we're in a position to profit from that volatility instead of being afraid of it."
They expect to start paying dividends in 2019. Sandstorm Gold is one of the very best ways to get leveraged exposure to precious metals. I urge you to take advantage of the post-earnings weakness to build a position.
George Putnam, The Turnaround Letter
We recognize that we can't predict the price of gold, nor do we hold any opinions on the merits of gold as an asset class.
Rather, we view gold mining companies the same way we look at any extractive industry: as operating companies that produce and sell a commodity into a deep market and generate cash flows.
Below are major, well-run mining companies with generally beaten-down valuations and prices. Providing potentially more sparkle: If the price of gold does begin to go up, the stocks of gold mining companies generally rise faster than the commodity itself.
Founded in 1957, with over $2 billion in revenues, Canada-based Agnico Eagle Mines Ltd. (AEM) sets the industry standard for quality, with its track record for meeting its financial and operational goals, strong balance sheet and growth profile.
All of its mines are located in low-risk countries: Canada, Mexico and Finland. Production could grow over 30% by 2020 from more output at its currently-operating mines, while its pipeline for future development looks healthy as well. Costs per ounce have declined by 17% in recent years, boosting its margins as gold prices have increased.
Its mines look to be the highest quality among its peers on grams of gold/ton basis. While the stock is more expensive than its peers, it remains 50% below the 2010 high and provides a valuable benchmark for the group.
Based in Toronto, Canada, Barrick Gold (ABX) is the world's largest gold mining company. Barrick's shares remain about 75% below their 2011 highs and trade at the lowest EV/EBITDA multiple of the group.
Investors worry about production issues at some mines, along with its rising capital spending profile as it struggles with longer-term production growth. Management is focused on reducing its now-reasonable debt level even further, increasing its operational efficiency and boosting its free cash flow.
Vancouver-based Goldcorp (GG) has grown through numerous acquisitions. Currently, all of its mines are located in the Americas, primarily Canada, Mexico, Argentina and Chile. The company has boosted its credibility in recent years by meeting its production and cost guidance.
Goldcorp's balance sheet is healthy and could have zero net debt by 2021. Management has outlined a credible plan to increase reserves by 20% and reduce costs per ounce by 20% by the year 2020. Combined with its steady capital spending profile, the outlook for free cash flow looks strong.
Founded in 2003 by its current chairman and CEO Peter Marrone, Toronto-based Yamana Gold (AUY) generates about 77% of its revenues from gold. Its mines are located in Canada, Brazil, Chile and Argentina.
Recently, better operational efficiency and exits from several non-core mines have improved its profit structure while helping to reduce its moderately elevated debt.
Yamana's large Cerro Moro mine in Argentina should start production this year, with all-in sustaining production costs of about $650/ounce. This new mine will significantly boost free cash flow as revenues increase while capital spending slows.
Disclosure: Employees of the publisher of The Turnaround Letter own stocks mentioned in this article.
Brien Lundin, Gold Newsletter
We've recently experienced a sudden, two-fold shift in investor sentiment: 1) They began to worry about inflation, and 2) they started to view gold as something to buy to hedge against that inflation, instead of selling it in anticipation of a more-hawkish Fed reaction.
I continue to believe the gold rally will continue this year, as it seems that investors are continuing to interpret new events as positive for the metal. In the meantime, some of our favorite juniors have been making news.
In Nova Scotia, Atlantic Gold (Vancouver: AGB; (SPVEF) ) announced additional assays from its Phase 3 infill and expansion program on its Fifteen Mile Stream and Cochrane Hill properties.
Overall, these results continue to provide encouragement that this Phase 3 program will allow Atlantic to prove up and expand the resources at both Fifteen Mile Stream and Cochrane Hill.
A recently released prefeasibility study indicates the current resources on these two satellite deposits to the MRC mining complex can boost that mine's production and economics considerably.
Producing companies with growing resources are exactly the type of levers we're looking to have in our portfolio as we move into the next phase of the gold market. Atlantic's still a Buy.
Excellon Resources (Toronto: EXN; (EXLLF) ) released more high-grade results from drilling on its Platosa Mine in Durango, Mexico.
The company plans to release an updated resource estimate based on drilling completed through the end of 2017. Given the quality of the results from this effort so far, I think this estimate has the potential to surprise the market to the upside.
Combined with the improving picture for the silver market, the high-grade results from Platosa argue for keeping Excellon at a buy at current levels, which is what we'll do.
GoldMining Inc. (Vancouver: GOLD; (GLDLF) ) is a large, global gold resource firm. Thanks to three acquisitions in 2017, GoldMining's total measured and indicated gold resources stand at 9.5 million ounces (12.4 million ounces gold-equivalent).
The company's acquisition of the La Mina gold-copper project has given the company a complement to Titiribi, its other Colombian gold-copper asset. The recent addition of the Yellowknife Gold Project in Canada's Northwest Territories gives the company 11,000 hectares of ground covering 30 kilometers of the Yellowknife Greenstone Belt.
Given the aggressive reputation and track record of GoldMining's management team, it wouldn't surprise me to see the company grow its global resource even more via acquisition in 2018.
The company's share price has trended down so far this year and, to my eyes, is trading at a very attractive level for accumulation, given the current environment for gold.
-- This article was originally published on March 15.