Gold price outlook
The contraction of -32.9% in the U.S. gross domestic product for the second quarter has added to the onus on the government and the Federal Reserve to continue with fiscal and monetary policies to sustain the U.S. economy and make borrowing cheaper.
The injection of massive amounts of liquidity into the economic system via debt and currency creation enhances inflationary concerns, which is likely to hurt the U.S. dollar's purchasing power.
A lower U.S. dollar will benefit the price of gold, as this classic safe-haven asset is a go-to protection against volatility and declining economic conditions. Thus, I believe the price of gold will keep on rising over the next quarters.
One way to profit from rising gold prices is through the stocks of gold mining companies. Amid gold mining stocks, I recommend Newmont Corp (NEM, Financial), Kinross Gold Corp (KGC, Financial) and Alamos Gold Inc (AGI, Financial), as these miners have already demonstrated higher return margins than most of their peer companies so far this year.
Newmont Corp
Newmont Corp is a well-known operator in the industry. A large portion of total production of attributable gold (approximately 75%) is being mined from surface operations and through open-pit mining techniques and the processing of stockpiles. This characteristic will play a crucial role during the pandemic as a possible resurgence of Covid-19 cases will most likely not affect the production from these mine sites.
Despite a 21% year over year fall in the gold output for the second quarter of 2020 to 1.26 million ounces, as well as an 8% increase in the all-in sustain cost (AISC) to $1,097 per ounce, Newmont has kept the full year 2020 guidance unaltered.
The U.S. miner targets to mine about 6 million ounces of gold this year from its total mineral reserves of 24.3 million ounces, enduring an AISC of $1,015 per ounce. The company will allocate about $1.4 billion to mining, exploration and development activities.
The stock has risen 59.3% so far this year, outperforming the VanEck Vectors Gold Miners Exchange Traded Funds (GDX) by 12.6%. The share price traded at $69.20 at close on Friday for a market capitalization of $55.57 billion.
The share price is 38.2% above the middle point of the 52-week range of $29.77 to $70.3 and the price-book ratio of 2.53 stands higher than the industry median of 2.06. However, the enterprise value-Ebitda ratio of 8.1 appeals more than the industry median of 10.95.
Wall Street sell-side analysts recommend an overweight rating for this stock with an average target price of $74.34, which mirrors a 7.4% upside from Friday’s closing price.
Kinross Gold Corp
The portfolio of the company is composed of assets located in the Americas, West Africa and Russia. Except for the Russia region, which is still seen as a tough business environment for North American companies, the other two do not pose any particular obstacle to the execution of mining activities. Currently, open-pit mines cover 70% of the total annual gold production.
In the second quarter of 2020, the attributable production of gold equivalent declined to 575,846 ounces, down 12% from the prior year quarter, and the AISC per ounce sold declined 6.4% to $984 per ounce sold. Higher gold prices, however, more than offset the production fall, determining a substantial improvement in the adjusted operating cash flow by 45% to nearly $417 million.
Furthermore, Kinross Gold Corp reaffirmed its initial guidance on gold equivalent output, costs and total funds to allocate to capital spending in 2020. Initially, Kinross Gold Corp targeted the gold equivalent output to range between 2.28 million and 2.52 million ounces, AISC to fluctuate between $921.50 and $1,018.50 per ounce and capex to vary from $855 million to $945 million.
The stock price rose by 97.7% so far this year, topping the VanEck Vectors Gold Miners Exchange Traded Funds by 51%. The share price closed at $9.37 on Friday for a market capitalization of $11.72 billion.
The share price is situated about 55% above the middle point of the 52-week range of $2.72 to $9.38, while the price-book ratio of 2.09 is near the industry median of 2.06 and the enterprise value-Ebitda ratio of 6.17 is well below the industry median of 10.95.
Wall Street sell-side analysts expect the stock will outperform with an average target price of $9.71 per share, reflecting a 4% upside from Friday’s closing price.
Alamos Gold Inc
Alamos Gold Inc is a Canadian mid-tier gold operator with producing assets in Canada and Mexico. Purchasing shares of Alamos Gold involves the bearing of a considerable investment risk as 70% of the total production currently derives from underground deposits, increasing mining efforts, costs and related risks, including higher potential for Covid-19-related shutdowns. Investors must also be aware that one of the mines is near a heavy drug trafficking area, which represents an additional risk factor to a portion of the company’s mining activities.
Alamos Gold Inc lowered its guidance on production for the full year of 2020 to 405,000 to 435,000 ounces, down 5.6% from the original range. The AISC per ounce is expected to be higher at $1,030 to $1,070 versus the previous initial forecast of $1,007 to $1,047.
Year to date, the stock has already outclassed the VanEck Vectors Junior Gold Miners Exchange Traded Funds (GDXJ) by 31%.
For the upcoming period, Wall Street gives the stock an overweight recommendation rating with a target price that is 15% above Friday's closing price.
The share price traded at $10.60 at close on Friday for a market capitalization of $4.22 billion.
The price-book ratio of 1.54 trades below the industry median of 2.06, and the current share price is 42% above the middle of the 52-week range of $3.34 to $11.58. The enterprise value-Ebitda ratio of 13.09 is higher than the industry median of 10.95.
Disclosure: I have no position in any security mentioned.
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