Outlook for gold and silver prices
Precious metal investors should consider the following stocks because, driven by low interest rates and fears of high levels of public debt, the price of gold and silver will rise, positioning operators in this space to achieve higher margins.
Low interest rates enable the economy to limit the damage caused by the Covid-19-induced crisis and reduce the opportunity cost of holding investments in gold and silver, making the precious metals more appealing than public bonds.
Today these fixed-income securities represent, however, national public debts whose amounts have reached such unparalleled levels that they significantly increase the risk of default for several countries. The concern of traders about this situation of uncertainty may reflect in strong fluctuations in the price of the securities traded on the markets, representing a problem for the investors' portfolio. The precious metal is the asset that offers the best protection against the storm.
Thus, a projection that sees gold at $2,000 an ounce and silver at $27 an ounce (up approximately 7% to 9% from Monday's closing prices) by the end of the first quarter of 2021 is, arguably, highly probable.
Year to date, gold futures have gained 20.3% to close at $1,866 per troy ounce on Monday, while silver futures have gained 37.1% to $24.794 per troy ounce, pushing shares of the following stocks higher during the same period.
International Tower Hill Mines Ltd. (THM, Financial) soared 168.5%, Alamos Gold Inc. (AGI, Financial) increased 54.3% and MAG Silver Corp. (MAG, Financial) gained 42.5%, outperforming the VanEck Vectors Gold Miners exchange-traded fund (GDX, Financial) by wide margins as this benchmark index for the industry rose 25%.
For the upcoming period, these stocks are expected to continue to rise as sell-side analysts have recommended one buy rating for International Tower Hill Mines and between hold and buy ratings for Alamos Gold and MAG Silver.
Also, International is projected to hit $5 within 52 weeks for a 245% upside from Monday's closing price of $1.45 per share, Alamos to rise to its $12.67 target, up about 36.4% from Monday's closing price of $9.29, and MAG to reach $21.67, up 28.5% from Monday's $16.87.
International Tower Hill Mines
Based in Vancouver, Canada, this mineral exploration company engages in the purchase and exploration of mineral properties that are located in North America. The operator holds a full interest in the Livengood Gold Project in Alaska, where activities have advanced to an exploration stage.
This project presents some interesting aspects mainly consisting in the existence of a large deposit of gold, one of the biggest in North America, accounting for about 9 million ounces in proven and probable reserves grading a respectable average of 0.71 grams per ton of mineral. Since the project is located close to the Alaskan city of Fairbanks, it is well served by a surrounding infrastructure that guarantees a good grade of connection to the ways of communication. Furthermore, the jurisdiction in Alaska is friendly from an exploration and mining standpoint.
In a nutshell, the project has everything the management board needs for planning the construction of the next top-class gold-producing asset in North America.
The company will likely have to find additional resources in the future as it aims to build the mine in this highly prospective area.
A total of $13 million is the amount of funds that International Tower Hill Mines has available as of Sept. 30 to upgrade its estimation of proven and probable reserves of gold, working on a basin of total 11.5 million ounces hosted in measured and indicated resources.
The stock has a market capitalization of $277.54 million and a 52-week range of 33 cents to $2.27.
The price-book ratio is 3.81 versus the industry median of 2.42. The enterprise value-Ebitda ratio is -67.96 (versus the industry median of 11.95) as the company is not producing an income yet.
Alamos Gold
Based in Toronto, this mid-class operator is producing gold from its deposits in Canada and Mexico, targeting to mine between 405,000 and 435,000 ounces this year, enduring an all-in sustaining cost of $1,030 to $1,070.
The type of techniques used to produce the metal (70% of total gold is mined at underground) and the location of some mineral projects expose the shareholders of Alamos to a significant investment risk as this miner has to put more efforts than the average peer, implying higher operating costs.
Investing in this gold stock can be profitable. In the third quarter of 2020, thanks to a higher gold output of 117,100 ounces (up 49% year over year) and realized price per ounce of $1,882 (up 30% year over year), the miner hit a record free cash flow of $76 million, which underpins a 33% hike in the dividend to 8 cents per common share. A quarterly dividend is expected to be paid this month.
The balance sheet is not charged with any debt, but holds $274.1 million in cash on hand to continue to develop specific metallic projects in Mexico and Canada from which the company expects to pull out further growth, underpinning a future return for the shareholders.
Alamos has 9.73 million ounces of gold in proven and probable mineral reserves and 7.04 million ounces of gold in measured and indicated mineral resources.
The stock has a market capitalization of $3.65 billion and a 52-week range of $3.34 to $11.58.
The price-book ratio is 1.27 versus the industry median of 2.42, while the enterprise value-Ebitda ratio is 9.86 versus the industry median of 11.95. The enterprise value-revenue ratio is 4.6 versus the industry median of 2.45. Thus, the Ebitda margin ratio of the company is 46.7%, beating the industry median of 20.5%.
MAG Silver
Based in Vancouver, Canada, the precious metal operator engages in the exploration and development of mineral projects that it acquires in the Americas. The most important asset in its portfolio is a 44% interest stake in the Juanicipio project, which is located in the Mexican state of Zacatecas.
The Juanicipio project is a high-grade silver project that MAG is developing in a joint venture with Fresnillo PLC (FNLPF), which has the other 56% interest stake in the mineral asset. Juanicipio contains 12.8 million metric tons of mineral in indicated resource grading 209 to 550 grams of silver per ton and 12.1 million metric tons of mineral in inferred resources grading 151 to 648 grams of silver per ton.
Juanicipio seems to be a financially robust project according to the base case scenario of the 2017 preliminary economic analysis report. The asset is expected to process 4,000 tons of mineral per day and produce silver, gold and other base metals for at least 19 years at an AISC of about $5.02 per ounce of silver. After start-up, which should follow the conclusion of optimization activities for the de-risking of the facility, the initial investment should payback in less than 48 months.
The internal rate of return of 44.5% is well beyond 30% to 35% rate that investors consider as an acceptable level. Also, at a 5% discount rate, the net present value of the project is - net of tax - $1.14 billion. When that is divided by 94.74 million shares outstanding, it yields $12.03 per share. So I would wait for a significant weakness that drags the share price below $12.03 before acquiring shares of MAG Silver in order to provide myself with a margin of safety.
The stock has a market capitalization of $1.6 billion and a 52-week range of $3.84 to $20.15.
The price-book ratio is 5.06 versus the industry median of 2.42. The enterprise value-Ebitda ratio is -159.49 (versus the industry median of 11.95) because the company is not producing an income currently.
Disclosure: I have no positions in any securities mentioned.
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