Gold and silver prices outlook
According to analysts, worldwide economies are forecasted to revive in 2021, picking up from approximately where they abandoned the expansion phase of the cycle due to the Covid-19 induced economic recession.
Until then, production, business activities and employment levels most likely need global central banks to inject additional monetary stimulus into the economic systems as the road to recovery appear bumpier than expected just a few months ago.
The U.S. Federal Reserve had decided to keep rates low even at the cost of inflation, and on Thursday, the European Central Bank announced no change in its main refinancing rate, confirming it at 0%. Similar measures to sustain economies are expected to be taken by other top international monetary authorities.
Since extremely low interest rates will cause a negative real yielding environment, investors are flocking to precious metals in search of protection.
Thus, gold and silver are both largely up year to date on the London bullion market, as they gained 28.8% to $1,966.25 an ounce and 51.2% to $27.105 an ounce, respectively, through close on Sept. 10.
In order to take advantage of the gold and silver bull market, investors may want to buy shares of B2Gold Corp (BTG, Financial), Equinox Gold Corp (EQX, Financial) and Hecla Mining Co (HL, Financial), as their strong mineral assets will likely help their share prices to continue to outperform most of their peers.
These stocks, which have already topped the industry averages, are also recommended by Wall Street sell-side analysts.
B2Gold Corp
The Canadian miner is targeting to mine approximately 1.03 million ounces of gold in total production for full year 2020 from its mineral deposits located in Mali, the Philippines, Namibia and Nicaragua, where B2Gold holds a 34% interest stake in two mines. The company will mine the precious metal sustaining about $435 in total cash operating costs per ounce produced and sold and about $800 in total all-in sustaining costs (AISCs) per ounce sold.
In the second quarter, B2Gold saw a 65.4% year over year rise in total revenue, which came in at $442 million, topping projections by $24 million as a result of higher output, metal prices, and a significant dip in AISCs.
The cash flow of the miner from its activities in Mali, the Philippines and Namibia hit a record amount as it grew 156% year over year up to $238 million, while the pro forma net earnings per share (EPS) of 11 cents was more than double the previous year but missed estimates by one cent.
The miner has a net cash position of $157 million and undrawn lines of credit of $175 million (which can be increased up to $375 million) to fund mill expansion projects, a solar plant construction, an underground mine development and drillings.
Holding shares of B2Gold Corp implies a high investment risk as more than 75% of mining activities are exposed to potential disruptions from political and social tensions and geophysical and meteorological factors.
The share price was $6.50 at close on Thursday, Sept. 10 for a market capitalization of $6.82 billion.
The stock price soared 62% so far this year, topping the VanEck Vectors Junior Gold Miners (GDXJ) exchange-traded funds by 23%.
The price-book ratio is 3.01 versus the industry median of 2.27 and the enterprise value-Ebitda ratio is 7.02 versus the industry median of 11.04. The share price trades 33.7% above the middle point of the 52-week range of $2.16 to $7.55, but still 14% below the upper limit of the interval. Also, the share price is above the 70- and 150-simple moving average lines, but still below the 35-SMA line.
The 14-day Relative Strength Indicator (RSI) of 50 suggests that the stock is yet to be overbought despite the huge share price increase.
On Wall Street, the stock has a buy recommendation rating and an average target price of $8.40, reflecting a 29.2% upside from Thursday's closing price.
Equinox Gold Corp
The Canadian mining company aims to mine 500,000 ounces of the yellow metal in full year 2020, enduring an AISC of approximately $1,000 per ounce sold. Equinox Gold will produce the precious metal from its six metallic projects located in the U.S., Mexico and Brazil, which will imply the payment of about $90 million in sustaining expenditures. Funds allocated to mill expansion, construction and exploration activities and the improvement of stripping ratios will be around $144 million.
The balance sheet appears robust. As of June 29, the total debt of $738.4 million surpasses total cash and cash equivalents by $244.2 million. However, this amount of net debt can be transformed into equity by the company, converting $252.6 million worth of notes into newly issued shares.
Furthermore, the operating profitability, which is measured by the Ebitda margin rate of 20%, is such that 12 months of activities can generate $150 million when gold is steadily above $1,550 per troy ounce. This price level represents about a 20% discount to the average price for the third quarter to date.
Investors should be aware that the total count of shares outstanding can increase by 29% to 310.64 million if Equinox Gold grants new shares under various plans, which will reduce several metrics, including EPS, with a possible repercussion on the stock price.
Purchasing shares of Equinox Gold Corp also involves taking on additional risk as approximately 40% of production is exposed to geophysical and meteorological risks. In particular, three Brazilian mineral assets are located in regions where strong storms are frequent with the possibility of floods and landslides during the early months of the year.
The Canadian miner holds 12.25 million ounces of gold in total proven and probable mineral reserves, grading between 0.56 and 1.84 grams per ton of ore.
The stock price closed at $11.65 per share on Thursday for a market capitalization of $2.82 billion after a year to date rise of 51.3%, topping the VanEck Vectors Junior Gold Miners exchange-traded funds by 12%.
The share price is 15% below the upper limit of the 52-week range of $4.63 to $13.66, though beyond the middle point of the interval by more than 25%. The price-book ratio of 1.98 stands lower than the industry median of 2.27, although the enterprise value to Ebitda ratio of 27.42 is more than double the industry median of 11.04.
Also, the share price is significantly underneath the 35-SMA line, on par with the 70-SMA line, but above the 150-SMA line.
The 14-day RSI of 41 suggests that the stock is still far from overbought levels.
Wall Street recommends buying Equinox Gold Corp, with an average target price that is 40% above current levels.
Hecla Mining Co
The U.S. mining company produces precious and base metals from its mineral properties located in Nevada, southeast Alaska, northern Idaho, northwestern Quebec, Canada and the Mexican State of Durango.
Except for the Mexican activities, which are at risk of seismic events as they fall into the 25,000-mile long chain called "The Ring of Fire," the other company's assets, which together account for more than 85% of total annual metal production, are in friendly mining jurisdiction and safe geographical areas. Thus, holding shares of Hecla mining implies a low to moderate outside risk.
From its mineral reserves, Hecla Mining Co is expected to produce approximately 11 million ounces of silver and 202,000 ounces of gold, paying an AISC of $1,150 to $1,250 per ounce of gold produced.
Total funds needed to run operations and back development and exploration activities will be a bit less than $105 million.
The balance sheet seems solid as it had $216 million in cash and short-term investments as of June 30, with $475 million in total debt that will not mature before 2029.
The operating activities are more profitable than most of the competitors as the Ebitda margin of 27.2% surpasses the industry median by more than 450 basis points. This translated into a 177% year over year increase in the trailing 12-month operating cash flow to $155 million as of the end of the second quarter of 2020.
As a result of higher silver output and prices, Hecla Mining topped consensus estimates on the second quarter pro forma EPS and revenue by one cent and $6 million, respectively, having recorded one cent per share net profit on total revenue of $166.4 million (up 24% from the year before).
The stock price was trading at $5.62 per share at close on Thursday for a market capitalization of $3 billion. The stock price increased by 65.5% so far this year, outperforming the VanEck Vectors Junior Gold Miners exchange-traded funds by 24%.
The price-book ratio is 1.81 versus the industry median of 2.27 and the enterprise value-Ebitda ratio is 18.48 versus the industry median of 11.04. The share price trades 37% above the middle point of the 52-week range of $1.40 to $6.79, but 17% below the upper limit of the range. Also, the share price is above the 70- and 150-simple moving average lines but still substantially below the 35-day SMA line.
The 14-day RSI of 48 tells that the stock is still far from the overbought levels despite the surge in the share price.
On Wall Street, the stock has a moderate buy recommendation rating and an average target price of $6.53, representing a 16.2% upside from Thursday's closing price.
Disclosure: I have no positions in any securities mentioned in this article.
Read more here:
- A Trio of Stock Picks for a 'Buy and Hold' Approach
- A Trio of Capital-Intensive Stocks for the Value Investor
- This Trio Trades Below the Peter Lynch Earnings Line
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
