Outlook for gold and silver prices
Gold and silver traded lower on Sept. 3 as the U.S. dollar added up for the third straight session. On Thursday, the gold price closed at $1,940.45 per troy ounce on the London bullion market and at $1,937.80 per troy ounce on the Comex, both down approximately 2%. Meanwhile, the silver price closed at $26.90 per troy ounce on the London bullion market and at $26.875 per troy ounce on the Comex, both losing approximately 6.6%.
Year to date, prices per ounce remain strongly up as the yellow metal has gained about 26% and the grey metal has grown 49.3%.
I think it is likely that gold and silver will continue to go up. Fears about higher inflation possibly following the next manufacturing sector's challenge to realign production with rising demand of goods will likely cause many investors flocking to gold and silver.
In search of protection for their assets, investors will increasingly prefer the precious metals to bonds as fixed income securities are less appealing in a low yielding environment triggered by the Federal Reserve's move to keep interest rates near zero and allow inflation to go above 2%.
In order to take advantage of rising gold and silver prices, investors may want to consider to increase their positions in gold and silver producers Paramount Gold Nevada Corp (PZG, Financial), Pan American Silver Corp (PAAS, Financial) and Agnico Eagle Mines Ltd (AEM, Financial), as their shares are performing very well and they possess good growth potential.
Paramount Gold Nevada
Shares of the Winnemucca, Nevada-based acquirer, explorer and developer of gold and silver deposits in Nevada and Oregon gained 39% so far this year to close at a price of $1.14 per unit on Thursday, for a market capitalization of $37.57 million.
The stock price's year to date performance is in line with the VanEck Vectors Junior Gold Miners (GDXJ) exchange-traded funds, which is the benchmark for the industry. The 14-day relative strength index of 41 suggests that the stock stands far from overbought levels.
Despite the impressive upside in the share price, the stock still appears not expensive as it is trading at 23% discount to the upper limit of the 52-week range of $0.47 to $1.48, and the price-book ratio of 0.72 places substantially below the industry median of 2.25. Furthermore, the share price is currently widely below the 75- and 35-simple moving average (SMA) lines.
The enterprise value to Ebitda ratio is negative, as Paramount Gold Nevada Corp is not yet producing any profit from mining activities.
Paramount Gold Nevada is focused on increasing the market value of its ore deposits by promoting them to mineral reserves from the lower category of mineral resources through the successful completion of drillings and the obtainment of the necessary permits from the local authorities. These mineral assets will be either sold to or exploited through joint venture agreements with well-known gold and silver miners. The creation of producing assets, where the company will mine the precious metal itself for its own production, is also a possibility.
Investing in Paramount Gold Nevada implies a minimal risk, in my view, as all the operator's assets consist of the development of high quality, low cost advanced mineral projects located in the United States, which is a friendly mining jurisdiction. These assets are adjacent to infrastructures and extend for more than 47,500 acres on prolific areas, which are already hosting operating activities of other mining companies.
Wall Street recommends to buy shares of Paramount Gold Nevada. The target price of $2.40 reflects a 111% upside from Thursday's closing price.
Pan American Silver
Shares of the Canadian explorer, developer and producer of silver traded at around $35.12 each at close on Thursday, determining a market capitalization of $7.43 billion.
The share price increased 48.3% so far this year, placing in between the Global X Silver Miners (SIL) exchange-traded fund (up 47% this year) and the iShares Silver Trust (SLV), which is up 53% this year. The 14-day relative strength index of 52 tells that the stock is still far from overbought levels.
Despite the soar, the share price is still about 12.5% below the upper limit of the 52-week range of $10.61 to $40.11 and slightly below the 35-day SMA line. However, the stock is not at its cheapest as the price-book value is 2.99 compared to the industry median of 2.25 and the enterprise value to Ebitda ratio is 17.39 versus the industry median of 10.74.
Pan American Silver's portfolio is equipped with strong operating activities as measured by an Ebitda margin rate of 30.24%, which is exceeding the industry median by nearly 700 basis points. The Ebitda margin ratio is one of the the most reliable indicators of profitability for companies operating in capital-intensive industries.
Investors should be aware that they take a considerable risk holding shares of Pan American Silver as 80% of the total production of the company derives from geographical regions where social, political and geophysical factors represent a threat to operating activities.
For full 2020, Pan American Silver aims to take advantage of rising metal prices with a mining output of 19 million to 22 million ounces of silver (paying an all-in sustain cost of $10.50 to $12.50 per ounce) and of 525,000 to 575,000 ounces of gold (enduring an AISC of $1,050 to $1,125).
The company also forecasts to mine 40,000 to 43,000 tons of zinc, 17,000 to 18,000 tons of lead and 4,300 to 4,900 tons of copper.
In the second quarter, as a result of higher precious metals prices, which more than offset the negative effects from lower year over year output of silver (down 57% to 2.8 million) and gold (down 38% to 96,600 ounces), Pan American topped consensus earnings per share (EPS) and revenue predictions.
Pan American Silver holds approximately 550 million ounces of silver grading 63 grams per ton and approximately 5.2 million ounces of gold grading 0.61 grams per ton of ore, both hosted in proven and probable mineral reserves as of June 30, 2020.
Wall Street recommends an overweight rating for the stock with an an average target price of $42.78 per share, representing a 22% upside from Thursday's closing price.
Agnico Eagle Mines
Shares of the Canadian producer of gold from mines in Canada, Mexico and Finland closed at $80.18 per unit on Thursday for a market capitalization of $19.47 billion, following a 30.1% year to date increase.
Regardless of the upside, the 14-day RSI of 54 indicates that the share price is still far from overbought levels.
The stock is not cheap as its share price is near the upper limit of the 52-week range of $31 to $84.66, the price-book ratio of 3.58 is higher than the industry median of 2.25 and the enterprise value to Ebitda ratio is 14.03 compared to the industry median of 10.74. Also, the share price is currently trading above 35-, 75- and 150-day SMA lines.
These ratios, plus Wall Street's average target price of $85.60 (which reflects just 7% upside from Thursday's closing price), suggest it might be better to wait for a more favorable entry point to purchase shares.
The portfolio of Agnico Eagle Mines is composed by highly profitable gold deposits as signaled by a trailing 12-month Ebitda margin ratio of 54.2%, which beats the industry median of 22.5%.
A beneficial ownership in Agnico implies a minimal to low investment risk as only 10% of the company's total gold production comes from a region where local factors could hamper the regular operation of mining activities and business in general.
Looking ahead to the second half and full year of 2020, Agnico Eagle guides for approximately 980,000 ounces and 1.71 million ounces of gold. The company anticipates total cash costs of $690 to $740 per ounce for the second half of this year. The full year AISC per ounce is projected to range between $1,025 and $1,075.
The Canadian mining company has about 19.08 million ounces of gold stored in proven and probable mineral reserves for 11 years of production.
The stock has an overweight recommendation rating on Wall Street.
Disclosure: I have no positions in any security mentioned.
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