Gold price outlook
In the first quarter of 2020, the U.S. gross domestic product contracted 4.8% on an annualized basis, marking the steepest decline since the final quarter of 2008. The manufacturing sector recorded its lowest level of activity over the last 11 years.
Furthermore, the risk of a new trade dispute between the U.S. and China contributes to global market uncertainty.
As a result, investors are flocking to safe haven assets to combat volatility, bringing a tailwind to gold prices.
To take advantage of the gold bull market, investors may want to consider the stocks of companies that mine the precious metal. My top picks in this industry are Yamana Gold Inc (AUY, Financial), Agnico Eagle Mines Ltd (AEM, Financial) and Pretium Resources Inc (PVG, Financial).
Canadian mid-tier miner Yamana Gold expects to deliver robust cash flows in the following quarters as a result of expected higher gold prices and the successful completion of projects to enhance the capacity of the Jacobina mill in Brazil.
In the first quarter of 2020, Jacobina already out performed, allowing the miner to reach total gold equivalent production of 221,746 ounces. This, along with better than expected costs, helped the net free cash flow of $91.1 million to surpass the average of the prior 12 months by 14%. Also, adjusted earnings per share of 5 cents topped analysts’ expectations by 2 cents. The revenue of $356.5 million exceeded predictions by $4.28 million, though this was 12.4% lower year over year.
Due to the challenging environment created by the pandemic, Yamana Gold downgraded its production guidance for full-year 2020. The company is now forecasting 786,000 ounces of gold and 10.3 million ounces of silver, down from prior 857,000 ounces of gold and 11.5 million ounces of silver.
The company remains in good shape to accomplish its target to lower the net debt-Ebitda ratio to below 1.0 through robust cash flow generation and monetization of several non-producing mineral assets.
On April 29, Yamana Gold announced another 25% increase in its annual dividend to 6.25 cents per common share, which will be effective starting the second quarter of the current year. Based on Monday’s closing price of $4.89 per share, the annual payment generates a forward dividend yield of 1.27%.
The stock has a market cap of $4.65 billion, a price-book ratio of 1.13 (versus the industry median of 1.31), an enterprise value-Ebitda ratio of 7.06 (versus the industry median of 8.31) and a 52-week range of $1.78 to $4.97.
Yamana Gold has an overweight recommendation rating from Wall Street with an average target price of $5.22 per share.
Agnico Eagle Mines
Canadian mid-tier gold miner Agnico Eagle Mines also expects to deliver higher cash flows over the following quarters, although it lowered its production guidance for full year 2020. Now the company is projecting to mine 1.63 million to 1.73 million ounces of gold, down 10.4% from the prior guidance of 1.875 million ounces.
The successful completion of several projects allowed the miner to upgrade its producing assets located in Mexico, Quebec and Northern Canada. The company aims to return part of the free cash flow to its shareholders through the payment of a quarterly cash dividend of 20 cents per common share.
Thanks to higher gold prices and sales volumes, the operating cash flow jumped 10% to $163.4 million in the first quarter (up from $148.7 million in the prior-year quarter) and the adjusted EPS rose 43.8% to 23 cents, topping analysts’ estimates by 3 cents. Revenue also grew by 26.2% to $671.88 million, beating consensus estimates by $21.55 million.
The stock closed at a price of $63.38 per share on Monday for a market capitalization of $15.25 billion, a price-book ratio of 3.06, (versus the industry median of 1.31), an enterprise value-Ebitda ratio of 12.86 (versus the industry median of 8.31) and a 52-week range of $31 to $64.88.
The stock has an overweight recommendation rating from Wall Street and an average target price of $66.18 per share.
Pretium Resources also represents an interesting opportunity for investors, as the Vancouver-based small gold operator targets to deliver strong cash flow in the range of $100 million to $170 million in 2020.
From its flagship mineral deposit, which is the Brucejack gold project in northwestern British Columbia, Pretium Resources aims to mine between 325,000 and 365,000 ounces of gold this year, enduring an all-in sustain cost of $910 to $1,060 per ounce.
The company could miss achieving these targets of gold output and cash flow, should operating activities be affected by temporary shutdowns.
In the first quarter of 2020, mining activities at the Brucejack mine were not impacted by the pandemic, and the company was able to post a 4.7% year over year increase in the production of gold to 82,888 ounces, paying an all-in sustain cost of $996 per ounce of gold sold. As a result of higher throughput and gold prices, the free cash flow climbed 19.4% to nearly $42 million, adjusted EPS of 14 cents topped consensus estimates by 4 cents and revenue grew by 22.7% to $126.56 million.
The share price traded at $8.47 at close on Monday for a market cap of $1.56 billion, a price-book ratio of 1.65, (versus the industry median of 1.31), an enterprise value-Ebitda ratio of 9.29 (versus the industry median of 8.31) and a 52-week range of $4.05 to $13.83.
Pretium Resources Inc does not pay dividends.
Wall Street sell-side analysts recommend an overweight recommendation rating with an average target price of $10.48 per share.
Disclosure: I have no positions in any security mentioned.
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