3 gold miners with a major advantage
Three miners to buy on dips
It has been a volatile year so far for precious metals, and luckily for bulls volatility is finally showing on the rise. However, although the Gold Mining Index (GDX) is over 13% of its March low, there are still several reasonably valued names in the sector, so steep declines should provide opportunities for further trading. purchase. Below, we’ll take a look at three names that have big discounts compared to their peer group and have a significant advantage, even if gold (GLD) remains below $ 1,800 / oz.
Barrick Gold (GOLD), Kirkland Lake Gold (KL), and Harmony Gold (HMY) have little in common with significantly different market caps, margins, and jurisdictions, but all share one key trait: They trade twice. figures free cash flow returns while paying dividends. As a rule of thumb, buying at 10% + free cash flow yields while being paid to wait is a great investment thesis, as long as the business is well run, has attractive margins, and is not heavily leveraged. . In the case of these three titles, they meet all three criteria, Kirkland Lake Gold being the star of the group.
Starting with Kirkland Lake Gold, the company has just come off an excellent first quarter with over 300,000 ounces of gold produced thanks to a strong performance from its new Detour Lake mine. Despite the fact that the first quarter is expected to be the lowest score of the quarter, KL managed to generate $ 0.60 in annual EPS and over $ 40 million in free cash flow, which pushed the cash flow available over twelve months from the company at over ~ 640 USD. MM. While this translates into a free cash flow return of just 7% based on KL’s enterprise value of $ 8.8 billion, it’s important to note that fiscal 2021 is set to be a massive year for the company, with a projected free cash flow figure closer to $ 1 billion. Therefore, the first quarter figure is less relevant, given that the first quarter represented barely 20% of the company’s planned gold production for fiscal 2021.
(Source: Company deposits, author’s table)
Based on $ 1 billion of expected free cash flow and an enterprise value of $ 8.8 billion, KL has a free cash flow yield of over 11%, pays a dividend of almost $ 0.75 per share and is trading at just 10x the FY2020 annual EPS estimate of $ 3.70. This is an incredible valuation for a company with the lowest costs in the industry with expected all-inclusive sustaining costs of $ 700 per ounce. It should also be noted that the $ 1 billion free cash flow assumes that the price of gold is on average only $ 1,800 / oz or less in fiscal year 2021 and does not exceed the levels. current. Given rising inflation expectations, a beating on this figure is possible, giving a valuation of a potential return on free cash flow closer to 12%. KL continues to be my top choice in the industry, and I would view any weakness below $ 37.00 as a buying opportunity. Based on a fair profit multiple of 15 and estimated annual EPS for fiscal 2022 of $ 4.00, I see a fair value for the share above $ 60.00 per share.
Switching to Barrick Gold (GOLD), the company is one of the largest gold companies in the world, with more than 70 million ounces of gold reserves. The company just released its first quarter results and posted 9% year-over-year revenue growth to $ 2.96 billion, helped by its exposure to copper across three different copper mines . This is a differentiator for Barrick, given that most gold producers focus strictly on gold. In the first quarter, the company’s copper margins climbed to $ 1.86 per pound in the first quarter, from $ 0.19 per pound in the same quarter last year.
(Source: Company deposits, author’s table)
As noted above, Barrick is a cash flow machine, generating over $ 700 million in free cash flow in the first quarter, which has pushed 12-month free cash flow to over $ 3.4 billion. of dollars. Based on Barrick’s enterprise value of $ 39 billion, that leaves the company trading at 9% free cash flow. However, with over $ 4 billion in free cash flow expected to be generated this year, Barrick is posting double-digit free cash flow performance for fiscal 2021. The bonus? Investors are paid to wait with a quarterly dividend of $ 0.09 and a special dividend paid in three installments of $ 0.14 during the year. So if we see weakness below $ 20.50, I would view that as a buying opportunity.
(Source: YCharts.com, author’s table)
The final name on the list is the riskiest, but it also has a significant torque with the price of gold. Harmony Gold is a mid-cap miner operating out of Africa in what are considered to be the worst mining jurisdictions in the world. In general, I would venture far from Africa for investments, but Harmony made a wise acquisition last year, is expected to start reporting positive annual EPS again this year, and has improved its leverage ratio to less than 0, 1x EBITDA on net debt. Finally, the company also just paid an interim dividend, giving the stock a forward yield of just under 2.00%.
Harmony has an inferior safety record, a much higher cost profile than its peers at $ 1,250 / oz compared to an industry average of $ 1,000 / oz, and also has a good deal of southern exposure. African. This makes the stock a high risk, high return bet, as it will suffer the most from the low price of gold due to its low margins. However, at the current share price of $ 4.80, the stock is trading less than 7 times the FY2021 annual EPS estimates, which appears to reflect the high jurisdictional risk and cost profile. much higher of society.
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.
GOLD shares were trading at $ 23.40 per share on Thursday morning, up $ 1.15 (+ 5.17%). Year-to-date, GOLD has gained 2.72%, compared to an 11.39% 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…