Outlook for gold and silver prices
The U.S. economy needs to improve a lot after the gross domestic product fell by 9.5% in the second quarter. Thus, the Trump administration is expected to issue an additional fiscal stimulus policy for households and enterprises in an attempt to give a boost to consumer spending and to sustain employment levels and business activities.
In the meantime, a weak U.S. dollar, which reflects deteriorated economic conditions, should keep the U.S. GDP afloat, as undoubtedly it also produces positive effects on the trade balance.
A low U.S. dollar will push gold and silver prices higher because these safe-haven assets are used by investors as a protection against the elevated volatility created by the current situation.
For the above reasons, I expect gold and silver will continue to rise over the next several quarters.
Precious metals operators
In order to make the best of the gold and silver bull market, I would recommend to increase the position in those U.S.-listed precious metals operators that are strongly positioned to surpass most of their competitors in terms of returns.
My proposals for the upcoming period are Bear Creek Mining Corp. (BCEKF, Financial), DRDGold Ltd. (DRD, Financial) and Eldorado Gold Corp. (EGO, Financial).
Bear Creek Mining
Bear Creek Mining is a Canadian company that owns the Corani large mineral project for future production of silver and other base metals, such as lead and zinc, in Peru.
The project, which extends on an area of 6,000 hectares, is situated in a well-served area of southeastern Peru, a country whose economy can be characterized as favorable toward mining legislation. The recent confidence in the new government of Prime Minister Walter Roger Martos Ruiz gives the country the necessary stability to continue entering agreements with various foreign and domestic companies for the exploitation of mineral resources.
Based on the last technical report, the Corani project hopes to produce approximately 9.6 million ounces of payable silver (in addition to 98 million pounds of lead and 69 million pounds of zinc) every year over a life of mine of 15 years. The project is robust from an economic standpoint as it has a compelling internal rate of return of 22.9%, a low all-in sustaining cost per ounce of metal sold and a fast recovery rate (2.4 years) of the invested capital.
The Corani project also has an after-tax net present value of $531 million (for five years of production), which divided by 111.26 million shares outstanding, yields $4.77 per share.
This means that as of today you can become the owner of the Peruvian metallic project and related growth potential at a significant discount of nearly 50% as shares of Bear Creek Mining closed at $2.43 on Aug. 12.
The stock has a market capitalization of $279.79 million, a 52-week range of 50 cents to $3.04 and a price-book ratio of 2.4 (versus the industry median of 2.14). The enterprise value-Ebitda is still negative at -15.18 as the operator has yet to reach a production stage.
Wall Street issued a buy recommendation rating with an average target price of $3.57, reflecting 47% upside from Wednesday's closing price.
DRDGold
DRDGold is a South African miner whose activities are currently focusing on recovering the yellow metal from the treatment of surface tailings that are situated in the central and western Witwatersrand basin in the South African province of Gauteng.
Though lower than guidance (due to Covid-19-related restrictions), DRDGold's gold output increased on a year-over-year basis to 174,385 ounces for the full fiscal year ended on June 30, up about 9% from 160,014 ounces in the prior year.
The increase was mainly a result of the contribution from the Far West Gold Recoveries operation, which DRDGold bought from gold mining company Sibanye-Stillwater in July 2018.
The absence of bank debt and the existence of nearly $100 million in cash and cash equivalents gives adequate financial strength to continue to develop surface mineral resources of 9.8 million ounces of gold and produce the precious metal from mineral reserves of 5.8 million ounces.
DRDGold is on track to achieve the target of 200,000 ounces in annual gold output, which, if commodity prices remain supportive, will improve the current Ebitda margin of 26%, producing positive repercussions on the stock.
The shares closed at $13.52 on Wednesday for a market capitalization of $1.18 billion, a 52-week range of $3.06 to $18.05 and a price-book ratio of 5.6 (versus the industry median of 2.14). The enterprise value-Ebitda ratio is 21.53 (versus the industry median of 10.63).
Wall Street recommends a moderate buy rating with an average target price of $11.5 per share.
Eldorado Gold
Eldorado Gold is a Canadian operator who is currently mining from its assets in Canada, Greece and Turkey.
Recent improvements, which include the extension of the life of the Kisladag mine in Turkey, the commencement of the Lamaque mine in Canada and higher performance of the Olympias mine in Greece, have raised the company's short- and medium-term production outlook.
The company said its production target for full 2020 is to mine between 520,000 and 550,000 ounces of gold (at an AISC of $850 to $950 per ounce sold), from its total proven and probable reserves of 17.5 million ounces (at 1.23 grams per ton average grade).
The annual gold output is expected to remain over 450,000 ounces for the next five years, remarkably improving from last year's production of 395,000 ounces of gold.
Undoubtedly, Eldorado Gold is positioned to take advantage of rising commodities prices.
An investment in Eldorado Gold, however, involves taking a considerable risk in regard to certain geopolitical issues. The company derives more than 60% of its income from Turkish producing assets, but aims to rebalance more in favor of Greece. However, as long as the company does not obtain all the necessary permits from local authorities to finalize several exploration and development projects, it cannot expand its activities in Greece.
The ongoing dispute between Greece and Turkey regarding the legitimacy of Turkish energy explorations in the Aegean Sea could be a reason for the delay.
Regardless of the portfolio composition issue, which Eldorado Gold should try to resolve, its stock performs well as it has gained nearly 40% so far this year versus the 35.5% return of the VanEck Vectors Gold Miners (GDX) exchange traded-fund.
The stock was trading at $10.89 per share at close on Wednesday for a market capitalization of $1.89 billion and a 52-week range of $4.6 to $13.2.
The price-book ratio is 0.52 (versus the industry median of 2.14) and the enterprise value-Ebitda ratio is 4.61 (versus the industry median of 10.63).
Wall Street recommends an overweight rating, which means the stock is expected to outperform either the industry or the entire market within a year, with an average target price of $13.91, mirroring a nearly 30% increase from Wednesday's closing price.
Disclosure: I have no positions in any securities mentioned.
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