When I screen for gold stocks I like to look at two parameters: The Enterprise Value to EBITDA (EV/EBITDA) ratio and the EVO (Enterprise Value divided by resources) metric.
In the EVO metric, I prefer to consider the reserves – proven and probable – those mineral resources that are known to be economically viable for extraction.
After having screened the gold stock industry in search for opportunities, I have ended up with the above list of four South African gold mining stocks that look very cheap according to the EV-EBITDA ratio and the EVO metric.
For the South African miners –Â AngloGold Ashanti Ltd. (AU, Financial), Gold Fields Ltd. (GFI, Financial), Harmony Gold Mining Co. Ltd. (HMY, Financial) and Sibanye Gold Ltd. (SBGL, Financial) –Â the EV-EBITDA ratio ranges between 3.32 and 5.58, and the EVO metric ranges between low values of $19.81 to $120.38.
When these values are compared to those of the Canadian gold mining companies that are listed on the American stock exchanges, it shows that the South African gold miners are cheaper compared to their North American peers.
It is wise to keep these gold producers in mind also when exposing the portfolio to gold since the yellow metal is – according to the analysts – set to uptrend in the second part of fiscal 2017 until hitting the price of $1,275 per troy ounce. This will be in response to a renewed investors’ interest in the yellow metal as geopolitical and economic risks increase and a flat yield curve plus a dovish monetary policy will persist worldwide.
In addition, analysts also think that gold prices will be propelled by the gold demand in India that is set to boost after the nationwide Goods and Services Tax – GST –Â entered into force in the country July 1, bringing more transparency to the gold supply chain and promoting the consumption of the yellow metal. India is the second-biggest consumer of the precious metal in the world after China.
Sibanye Gold operates Driefontein, Kloof, Beatrix and Cooke gold mines in South Africa, where the yellow metal is extracted through surface and underground activities. The miner also operates a platinum division with platinum mining operations in South Africa and Zimbabwe and after the acquisition of Stillwater Mining Co. (NYSE:SWC), Sibanye Gold also holds palladium and platinum operations in Montana.
The mining company is advancing metallic projects in South Africa. For fiscal 2017, Sibanye expects to produce between 1.51 million and 1.54 million ounces of gold at a total cash cost per ounce of gold ranging between $890 and $910 and at an all-in sustaining cost (AISC) per ounce of gold ranging between $1,080 and $1,105. The total amount of funds expected by the miner to be spent as capex over fiscal 2017 is approximately $300 million. From the Platinum division, the company expects to produce between 1.05 million ounces and 1.10 million ounces of the platinum-group metals including platinum, palladium and rhodium.
For Sibanye Gold, analysts have set a target price per share of $9.11 versus a current share price of $4.55. The recommendation rating is 2.5 out of 5.
Gold Fields derives its revenue from the sale of gold that is extracted through surface and underground mining techniques. The South African miner’s operations are located in three continents. The mining company holds the Cerro Conora mine in Peru where it extracts gold and copper. At Tarkwa and Damang in Ghana (West Africa Region) gold is extracted through surface mining technique while at South Deep (South Africa Region) the yellow metal is dug up with underground activities. Open pit and underground operations run by the miner at St. Ives, Agnew, Darlot and Granny Smith mines in Australia, complete Gold Fields’ portfolio of assets. Gold Fields also has a 50% interest stake in the Gruyere undeveloped gold project located in Western Australia.
For 2017 the company estimates attributable equivalent gold production will range between 2.1 million ounces and 2.15 million ounces with AISC expected to be $1,010 to $1,030 per ounce.
Recently Gold Fields has been upgraded by Goldman. The U.S. firm increased its rating from Sell to Neutral. The recommendation rating for Gold Fields is 3.3 out of 5 with an average target price of $3.22 per share versus the current share price of $3.41 per share.
Harmony Gold extracts gold through one open-pit, underground technique in nine mines and several surface mining activities in South Africa. The South African gold mining company is transitioning to Papua New Guinea, where it already has one open pit to produce gold and silver. In Papua New Guinea, Harmony is also developing several metallic projects.
For full-fiscal 2017, which ended on June 30, a gold production of 1.05 million ounces is expected. Operating and financial results for full-fiscal 2017 will be released by Harmony sometime in October.
Harmony has a recommendation rating of 2.7 out of 5 and an average target price of $2.60 per share versus a current share price of $1.61.
AngloGold produces gold thanks to its Vaal River and West Wits producing mines in South Africa and its producing mines that belong to the company’s international operations division. Internationally the South African miner runs operations in the Democratic Republic of Congo, in Ghana, in Guinea, in Mali, in Tanzania, in Australasia and in the Americas.
For full-year 2017, AngloGold expects production to be 3.6 million ounces to 3.75 million ounces of gold at an AISC of $1,050 per ounce to $1,100 per ounce and cash costs per ounce to be of $750 to $800.
The recommendation rating for AngloGold is 2.5 out of 5 with an average target price of $12.96 versus a current share price of $9.47.
There isn’t any doubt that, when we look at the EVO metric and EV/EBITDA ratio, these four South African gold stocks look very cheap and more convenient than their Canadian peers at the moment. Before either starting or increasing a position in these gold stocks, I would wait until the High Court in Pretoria halts the new mining charter of the South African government that envisages the requirement of increasing black ownership from the current level of 26% to 30%. Elevated levels of black ownership in the gold mining industry have in the past been associated with phenomena of poor management conducts.
Disclosure: I have no positions in any stock mentioned in this article.
