In a scary coronavirus recession, relief for many investors is spelled G-O-L-D.
Gold prices have shot up to a 7-1/2-year high as investors have fled other assets more sensitive to the economy. Gold stocks like Barrick Gold (GOLD), Kinross Gold (KGC) and Kirkland Lake Gold (KL) have led the stock market higher. And improved management at many of the gold mining stocks could provide a platform for further gains beyond just the price of gold.
The path for gold stocks is not definite. Despite many players’ hefty first-quarter profits, companies including Newmont (NEM), Agnico Eagle (AEM), Wheaton Precious Metals (WPM) and Kinross Gold deferred guidance over uncertainties tied to the coronavirus pandemic.
But that hasn’t discouraged investors. While the Nasdaq has rebounded 40% from the March bottom of the coronavirus stock market crash, the 62 stocks in IBD’s Mining-Gold/Silver/Gems group have staged a 115% bounce.
As of Thursday, the Nasdaq showed a year-to-date gain of 3.5%. The gold stocks group was up 16.5% — one of the top 10 gains among industries this year.
Gold prices climbed as investors sought a stable asset to hedge their portfolios against uncertainty and risk. That price gain, in turn, drove demand for gold mining stocks and gold exchange traded funds. In Q1, gold ETFs saw a sevenfold increase in year-over-year capital inflows, according to the World Gold Council, or WGC.
Coronavirus And Gold Demand
Gold’s 13.5% return so far this year has made it one of the best-performing asset classes, rivaling U.S. Treasurys and easily outperforming stocks in general.
“Investors are looking for a better understanding of the long-term implications of Covid-19 on the global economy, and that may take some time,” said Juan Carlos Artigas, WGC head of research. “In the meantime, investors continue to add gold to their portfolios.”
WGC calls the coronavirus outbreak “the single biggest factor” influencing gold demand. The Fed cut its target interest rate to near zero as the deadly virus rattled the economy, burnishing the competitive allure of gold vs. bonds.
Globally, too, vast efforts to prop up economies with fiscal and monetary stimulus are boosting gold’s outlook, as a counterweight to the glut of currencies. Gold prices have shot to within shouting distance of record highs.
Bank of America’s mega-bullish forecast has gold soaring to $3,000 an ounce in the next 18 months. That would be a 73% increase from where gold prices traded on Friday. Gold giant Newmont expects prices to top $2,000 an ounce, thanks to massive global stimulus.
Gold Stocks Break Out
Currently, gold trades above $1,730. It was around $1,500 at the start of the year and around $1,270 a year ago.
Morningstar analyst Kristoffer Inton said the run-up in gold stocks is “all about the gold price.” A $1 increase in gold prices compounds the free cash flow of a gold mining stock, due to operating and financial leverage, he says.
In the first quarter, higher gold prices fueled an industry revenue and cash flow spurt.
Free cash flow is a key industry metric. Gold miners invest surplus cash to reduce debt, pay dividends and invest in projects that drive long-term value. (Check out these top dividend stocks to watch.)
After several years of cost cutting, sharply higher gold prices are enabling companies to grow free cash flow at an impressive clip.
That sends gold stocks higher. As of Thursday, the gold miners group ranked No. 4 in six-month price performance among the 197 industry groups tracked by IBD.
A number of gold stocks have broken out into new price upturns on a technical basis.
Barrick Gold stock is extended after clearing a 22.67 buy point April 13. Newmont stock is up more than 46% this year, after logging only a one-week pullback during the market’s coronavirus sell-off. Wheaton stock has run up 48% after an April 9 breakout above a 30.39 buy point.
Gold mining stocks like Franco-Nevada (FNV) and Kirkland Lake feature prominently in the IBD 50 list of leading growth stocks. Franco-Nevada stock is up 21% from a 122.75 entry cleared April 14. Kirkland Lake Gold stock is below a handle buy point at 44.33.
Gold Stocks Bulk Up
While safe-haven gold has fueled gains for gold stocks, several analysts see more to the rally.
“In a lot of ways, the industry has never been better run than it is right now,” said Carey MacRury of Canaccord Genuity.
Around the time of the Great Recession, miners were notoriously bad allocators of capital, Inton contends. They spent lavishly on acquisitions, plowed money into projects that never opened and took large write-downs on the value of mining assets.
Now many of the industry’s largest players, like Barrick Gold, have become more disciplined, lower-cost gold miners. Balance sheets are in good shape, MacRury says.
The top gold mining stocks look to generate free cash flow even at lower gold prices by reducing costs. The global average all-in sustaining cost (AISC) of gold production was $936 per ounce in 2019, down from $1,091 in 2012, according to Metals Focus Gold Mine Cost Service.
Industry-leading gold stocks have been growing the top line at a furious clip, partly on the back of megamergers.
Barrick Gold Stock After Randgold Merger
Barrick Gold stock on Friday was up more than 42% for 2020.
In 2019, Barrick acquired Randgold in a $7.8 billion deal, and Newmont purchased Goldcorp for $10 billion. Barrick Gold and Newmont also combined adjacent assets to create the world’s largest gold mining complex in Nevada.
The upsized Barrick Gold produced 5.5 million ounces of gold last year, a 21% year-over-year increase, while almost halving debt. Its AISC was $894 per ounce. It realized an average gold price of $1,396 per ounce, the highest since 2013.
For the full year, Barrick earnings per share jumped 46% to 51 cents. Free cash flow surged more than 210% to $1.132 billion, following a 45% drop in 2018.
Barrick Gold stock had struggled for more than a decade. Shares began to recover late last year, alongside the company’s turnaround. The Canadian gold mining stock shifted focus away from growing gold production and toward increasing cash flow. It shed unprofitable mines and used the proceeds to pay down debt.
Now Barrick is pursuing more exposure to copper, which is key in electrical and plumbing markets. It’s been eyeing the Grasberg mine of Freeport-McMoRan (FCX), and its $3 billion cash war chest boosts its ability to make a copper deal, CEO Mark Bristow suggested on a May 6 earnings call.
Newmont Stock After Goldcorp Merger
Newmont has made a few missteps. But Newmont stock, which has benefited from the merger with struggling rival Goldcorp, was up 46% for the year on Friday.
“That’s really the opportunity for Newmont,” said Morningstar analyst Kristoffer Inton. “It’s a good operator trying to extract value out of assets that underdelivered.”
In 2019, the Colorado miner produced 6.3 million ounces of gold at an AISC of $966 per ounce. Earnings dipped 1.5% to $1.32 per share. But Newmont stock saw free cash flow surge more than 75% to $1.413 billion.
The Barrick-Newmont joint venture is another potential catalyst. Called Nevada Gold Mines, it should deliver synergies and boost the growth outlook of both companies.
“It was a good way for them to unlock some value without actually having to merge,” Inton said.
Kinross Gold Stock And Others
For Agnico Eagle Mines, the past decade was about bringing mines online at a rapid clip. Unlike many of its competitors, it’s focused on growing gold production in politically stable jurisdictions. Some uncertain development projects are drawing investor interest.
“When you see good deposits, (the stock’s) usually fairly valued. When you buy deposits that didn’t deliver as promised, that’s when as an investor you could find potential opportunities,” Inton said.
Kinross Gold has been expanding into new regions via acquisitions. MacRury likes the Canadian gold mining stock due to the company’s improving project pipeline and strong balance sheet.
And with higher gold prices, the analyst expects Kinross Gold should start to generate strong cash flow. He’s calling for more than $700 million of FCF in 2020, up from $16 million in 2019. That’s a plus for Kinross Gold stock.
Kirkland Lake’s Jan. 31 takeover of rival Detour Gold boosted Q1 results. EPS rose 30% to 70 cents as revenue jumped 82% to $554.7 million.
But the business “really showed its strength” with record Q1 FCF of over $190 million, management said. The Detour Lake mine contributed $78 million, or 41% of the total, in only two months of operations with Kirkland Lake.
The Detour deal is key for Kirkland Lake stock, helping to ease worries about short mine life at Kirkland’s core Fosterville site in Australia.
At Deutsche Bank, analyst Chris Terry rates Wheaton Precious Metals stock a buy. In Q1, the gold royalty company grew EPS 65% and lowered debt by 44%. Year to date, Wheaton stock has climbed almost 52%.
Terry says the company is well-positioned for deal-making. “We believe M&A activity could perk up, as miners could face liquidity and cash flow constraints over the next year related to Covid-19,” he wrote May 6. “Streamers can therefore partner or assist companies with near-term cash needs.”
Royalty and streaming companies provide upfront capital to miners, eventually receiving a share of revenue, profits or production. Their stocks generally offer a more attractive risk-to-reward profile than gold mining stocks. (Go to the IBD Stock Checkup to get fundamental and technical ratings for Kinross Gold stock, Kirkland Lake Gold stock and others.)
Coronavirus Impact On Gold Mining
Most gold mining companies have seen only minor disruptions from the coronavirus pandemic, analysts say. At the end of the day, mines typically are in remote locations, with workers trained to wear protective gear.
There are exceptions. Wheaton Precious Metals suspended six production streams in Peru and Mexico, while Agnico briefly halted operations in Canada due to mandatory shutdowns.
Also, citing uncertainty around the duration and ultimate impact of the pandemic, many gold companies pulled cost and production guidance.
But Barrick Gold, which saw little Covid-19 impact in Q1, maintained its 2020 outlook in what Inton calls “a rare sign of confidence and stability.”
Barrick conducted employee temperature screenings and rapid antibody tests to mitigate Covid impact. At the same time, it had to manage through the “restrictive conditions imposed by governments,” the company said.
A supply chain integrated across continents, combined with strong supplier relationships also helped the gold mining stock.
“Not only have we focused on … ensuring we have alternate procurement and logistic arrangements in place, we have also increased the stocks of consumables and other fast-moving items at our mines,” Barrick Gold said during its May 6 earnings report.
‘Lofty’ Gold Prices?
While Newmont and Bank of America see even higher gold prices ahead, Morningstar’s Inton called current gold prices lofty and unsustainable. His near-term gold price forecast is $1,500 an ounce and his midcycle view is $1,250 an ounce by 2022.
Investment demand is a “double-edged sword,” since today’s demand is tomorrow’s supply, he said. Meaning, all those investors currently piling into gold and gold mining stocks would sell their holdings if the economy starts to look more normal and the Fed raised rates again.
Inton warns of a reversal for gold stocks if the price of gold falls as he expects. “You can do what you want with operations, but you can’t get over a massive decline in the gold price,” he said.
Find Aparna Narayanan on Twitter at @IBD_ANarayanan.
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