3 gold miners to buy on the dips
It was a good start to Q2 for the Gold Miners (GDX) index with the ETF rising 21% in less than two months, benefiting from a strong rebound after its 8-month correction. This strong recovery can be partly attributed to a new multi-year inflation spike of 4.2%, which pushed real rates to a value of (-) 4%, placing a relentless supply below the price of gold ( GLD). While this strong recovery has left a number of miners almost fully valued, several miners are still trading at a significant discount to their peers with upside potential of over 50% over the next 12 months. In this update, we’ll take a look at two miners who are still trading at very cheap valuations and a major silver producer, which is a name to keep on its radar if we see any turmoil later this quarter.
Kirkland Lake Gold (KL), Hecla Mining (HL) and Eldorado Gold (EGO) have little in common, the former being a senior high margin gold producer, the latter being a high margin silver producer and the latter being a mid-level gold producer with a very promising future. However, all three are special for their own reasons, with one having the best margins in the industry, Hecla having the best jurisdictional profile among its producers and Eldorado Gold sitting on a transformative asset that makes it an asymmetric reward over risk. Let’s take a closer look at the three companies below:
Starting with Eldorado Gold, the company recently released its first quarter results and reported on-plan gold production for fiscal 2021 at ~ 111,000 ounces versus a forecast of ~ 445,000 ounces on an annual basis. Although costs have increased over the period, the company’s Lamaque mine in Quebec continues to perform well and strives to reach nearly 190,000 ounces per year by fiscal 2024, up from approximately 140,000. ounces per year currently. Production declined slightly year over year in the first quarter, but Eldorado has consistently posted higher revenues, thanks to an almost 10% increase in the average realized year-to-year price of gold. ‘other. The biggest news was the approval of a dry tailings permit in the development phase of its Skouries project, and the project eventually moved forward after years stuck in a rut.
(Source: YCharts.com, author’s table)
If we look at the above chart of annual EPS, there is little to like about EGO, with FY2021, FY2022, and FY2023 annual EPS expected to be lower than FY20202. This is due to lower production at the company’s flagship asset, Kisladag, in Turkey, which offsets higher production at Lamaque and Olympias, the company’s two smaller mines. However, while Eldorado doesn’t look too cheap with more than 15 times the FY2022 annual EPS estimate ($ 0.76), these results don’t reflect what the company might look like if its plan to Greek development goes into production. According to a 2018 study, Skouries has the potential to produce over 250,000 ounces of gold equivalent per year at all-in sustaining costs of less than $ 100 / oz based on copper by-product credits, which would increase Eldorado’s annual EPS to over $ 1.60 by FY2025. even at current gold prices.
It is important to note that the project is not yet approved, but that it is a game-changer for EGO as it would revamp the company’s margin profile. The fact that the company has finally moved forward to move closer to production and make deals with the Greek government is a plus, and if approved for construction it would lead to a reassessment of the stock later this year. So while EGO is nothing special and has mediocre benefits without Skouries, it has a huge advantage if Skouries ends up being developed. With work progressing at a rapid pace, it looks like the project could be approved, resulting in a fair value closer to US $ 16.00 for EGO. This would translate into an increase of over 40% from current levels.
(Source: YCharts.com, author’s table)
Switching to Hecla Mining, the stock had an incredible run and is now trading at over 25 times earnings over the stock price of $ 7.30. This is a very expensive assessment, even for a Tier 1 silver producer, but the company is in the position of being the only silver producer with multiple assets operating in strictly Tier 1 jurisdictions. This distinction makes the company much more attractive than its peers, with most of its peers operating in Mexico, South America or China. The company just finished a massive quarter with around 3.46 million ounces of silver produced at $ 7.21 / oz, which translates into margins of over 70% at spot silver prices. If we assume a fair profit multiple of 20 and annual EPS of $ 0.29 for fiscal 2022, the security is still valued richly, with fair value closer to $ 6.00.
That said, annual EPS estimates for FY2022 seem conservative at this point, and we could see HL reporting as much as $ 0.35 in annual EPS if this rise in the price of silver continues. So if the stock cools down and drops below the $ 6.00 level, that would provide a low risk buying opportunity, given that it is one of the more silver stocks. searched for space. Unlike the gold business, there aren’t many Tier 1 names to choose from, and certainly no Tier 1 names with blue chip margins other than Hecla. So with a distinction as one of the best in the business, I would expect big drops of 20% or more to be redeemed, which makes Hecla a great candidate to buy the dip.
The last name on the list is Kirkland Lake Gold, arguably the best producer in the gold sector with expected production of around 1.40 million ounces this year at all-inclusive sustaining costs of less than $ 825 per ounce. The company has just come out of a strong quarter with gold production of over 302,000 ounces, with a target of 280,000 ounces for the first quarter. This is preparing the business at a tremendous pace in FY2021. Like Eldorado Gold, Kirkland Lake in 2021 underestimates the true potential compared to what the company could look like in 2024. As reported on the conference call, the company is working on a major throughput capacity upgrade. from its Detour Lake mine to 32 million. tonnes per year and plans to reach 28 million tonnes per year (currently 23 million) as quickly as possible. This is expected to increase annual gold production at Detour from about 550,000 ounces by FY2020 to between 850,000 and 900,000 ounces by FY2025, a growth of 50%. This will reduce unit costs to less than $ 775 / oz, compared to $ 1,100 / oz currently. So while the company is on track to deliver annual EPS of $ 3.67 in FY2021, the real potential is over $ 4.90 in FY2024, especially if the company maintains its aggressive buyback program.
(Source: YCharts.com, author’s table)
Despite industry-leading margins, KL is valued at just 10.8x FY2022 profit estimates ($ 3.98), and it’s worth noting that the company sits on more than 3, 00 USD in cash and debt free. So, on a cash-adjusted basis, the stock is valued at just 10x next year’s earnings, with the potential to increase annual EPS by more than 40% between fiscal 2020 and 2024 ( $ 4.90 vs. $ 3.38). This is a very cheap valuation for a high margin producer operating in the safest jurisdictions around the world. Even though we use a conservative earnings multiple of 15 for fiscal 2022, this translates to a fair value of $ 59.70, almost 40% higher from current levels. This assumes that the price of gold is not hitting new highs, which would lead to a rise in FY2022 annual EPS.
While some investors might think they missed the boat after a strong rally in GDX, I think there are still some solid bets worth buying if there is a dip. The two most obvious names are KL followed by EGO, with HL being the best game in the silver space. However, in the case of HL, I don’t see a low risk entry unless the stock pulls back significantly. I continue to stay long in KL as the stock is one of my biggest positions, and I may consider starting 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 interpreted as financial or investment advice on any matter whatsoever. Taylor Dart expressly disclaims any responsibility for any action taken based on any or all of the information contained in 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%, compared to an 11.10% increase in the benchmark S&P 500 over the same period.
About the Author: Taylor Dart
Taylor has over a decade of investment experience, with a particular focus on the precious metals industry. In addition to working with ETFDailyNews, he is a leading writer on Seeking Alpha. Learn more about Taylor’s background, as well as links to his most recent articles. After…