The economic crisis due to Covid-19 has been of such magnitude that it caused governments around the world to issue record amounts of fiscal stimulus. Millions of businesses were bailed out and unemployment programs were expanded. Not only did these measures successfully support the economy during the lockdowns, they have led to an economic boom afterwards because the majority of people have money to spend.
However, this phase is also generating high inflation as easy money policies have yet to be scaled back. The combination of easy money policies, strong rebound in the demand for goods and services and supply chain issues makes a potent recipe for inflation to spiral out of control.
In decades past, central banks would likely have raised interest rates by now to counter the rise in the price of goods and services. Under current conditions, however, the top monetary authorities judge it appropriate to continue with rates around zero percent in order to allow companies to keep taking on additional cheap debt.
High inflation and very low (or in some cases negative) interest rates on central banks' funds is a combination that could put a strain on the portfolios of investors, who must therefore enact a suitable strategy to preserve the value of their investments.
The most recognized and effective strategy to protect against inflation is to invest in safe-haven assets such as gold. As a result, the demand for gold as an investment instrument will increase in the coming years, and this will likely produce a rise in the price of the precious metal.
Economists expect that gold will be trading at around $1,965 per ounce in 12 months’ time, which would reflect a 12% upside from the $1,757.20 per ounce price that gold futures with expirations in December 2021 were trading at as of the writing of this article.
One way to take advantage of this expected rise in the price of gold is through U.S. listed equities in gold mining companies, as these stocks usually tend to record higher gains than the commodity they produce when the price of gold rises. One such gold miner is Kinross Gold Corp (KGC, Financial), which is among the gold companies with the best potential for future growth.
The Toronto, Canada-based company is an explorer, developer and miner of gold properties in the United States, Brazil, Chile, Russia, Mauritania and Ghana. The company forecasts that its annual production of equivalent gold is on track to reach 2.1 million ounces in 2021, after which it will increase to 2.7 million ounces in 2022 and 2.9 million ounces in 2023. These output levels will represent sequential year-over-year increases of 28.6% and 7.4%, respectively, thanks to the improvement of certain operations in Mauritania and Chile, which are expected to deliver robust production as soon as they are working again.
Gradually higher output should allow the company to lower the all-in sustain cost (AISC) per ounce of metal sold in 2022 and 2023. Looking ahead to full-year 2021, the company estimates it will endure an AISC of $1,055 to $1,170 per ounce, which, coupled with the expected rise in the price of gold, should lift the margin per ounce up significantly, potentially to more than 10%. If this happens, it will produce a strong tailwind for the generation of robust free cash flow.
GuruFocus rates Kinross Gold's financial strength with a good score of 6 out of 10, which should help it to sustain its share repurchases and pay dividends. The company is currently paying a quarterly dividend of 3 cents per common share. The next payment is scheduled for Sept. 2 and the forward dividend yield is 2.07% as of the writing of this article.
The stock traded at $5.93 at close on Thursday, which was below the 50-Day Moving Average of $6.28 and the 200-Day Moving Average of $6.98. The market cap is $7.48 billion and the 52-week range is $5.84 to $10.31.
The price-book ratio is 1.12 versus the industry median of 2.4 and the enterprise value-Ebitda ratio is 3.05 versus the industry median of 10.47. The 14-day relative strength index is 36, which means the stock is not far from oversold levels following a 32% drop that happened over the past year.
Wall Street believes the share price will outperform the market as sell-side analysts have recommended a rating of overweight. Their estimates on the price target average $9.90.
Disclosure: I have no positions in any securities mentioned.