There is no doubt about it: gold is hot right now.
Dropping confidence in central bankers and negative interest rate policies, sinking currencies around the globe, equities that haven’t advanced beyond high marks hit over a year ago, and depressed yields in bonds all contribute to renewed attention.
George Soros is betting big on it. For a 25-year period from 1986 through 2010, Stan Druckenmiller achieved an annualized rate of return of 30%. He’s betting on gold, too.
Jeffrey Gundlach, CEO of DoubleLine, called the oil price plunge, that junk bonds would live up to their name, and went against the crowd in 2014 by accurately predicting that U.S. Treasury yields would fall.
He is putting a $1,400+ target on gold prices this year, and we’re steadily getting within reach of it.
However, the gold market goes well beyond the spot price. After all, miners aren’t just digging holes and pulling out bars and coins.
A whole lot of capital spending and infrastructure is needed, and that makes the major gold miners the main source of supply to meet all of this demand.
Let’s take a look at the state of the five biggest majors and get a feel for their prospects as this new gold bull run builds up momentum.
Barrick Gold Corp (NYSE: ABX)
With a $24.25 billion market capitalization, this is the biggest name in gold, and the one you’ve probably seen most often.
Barrick stumbled as gold prices dropped over the last several years, at the risk of an understatement. It struggled to reduce costs while sitting on a mountain of debt.
It had to shed assets and mines as a result, leading to a steep drop in production. In 2015, it produced 6.12 million ounces. This year will come in around 5 to 5.5 million ounces.
Going forward, the company hopes to keep production over 4.5 million through 2020. That goal represents a roughly 25% drop in production, and thus potential revenue.
However, things are looking better. All-in sustaining costs fell from $864 per ounce to $831 in 2015, and the company expects the 2016 average to be between $775 and $825.
That means better cash flow and return on investment. The company posted its first positive free cash flow in 2015 — $471 million for the full year — for the first time in four years.
Its total debt of $9 billion at the end of the first quarter is still pretty bad, but rising gold prices alleviate some of the pressure. Plus, it is a vast improvement over the $12.8 billion Barrick was on the hook for just a year ago.
Unfortunately, its dividend cuts and write-downs still weigh on it. This stock is only providing a 0.4% dividend these days.
However, it is sitting on $2 billion in cash, and a third of its declared ounces are in mines without development. Some smart moves in the coming months could draw in reluctant investors.
If Barrick continues to fix itself and gold prices rise, it could outpace its peers in appreciation through the end of the year.
However, don’t expect the year-to-date run we’ve seen so far — over 170% — to continue. That was the company returning to the fold after being beaten into the ground.
Newmont Mining Corp. (NYSE: NEM)
Next up by market cap is Newmont Mining, with $19.5 billion invested and a close to 100% gain for the year so far.
First-quarter reports were phenomenal, with the main headline being an earnings surprise of $0.34 per share, a full $0.14 above analyst estimates.
All-in sustaining costs dropped from $999 in Q4 2015 to $828 in Q1 2016, while Newmont’s gold margin grew from $159 to $366 over the same period… all while the average realized gold price it collected only rose from $1,158 to $1,194.
Newmont is still sitting on $5.7 billion debt, with $2.4 billion in cash and equivalents on the other side of the ledger.
At the end of the first quarter of 2016, Newmont’s debt-to-capital ratio was 28.6%, compared to 32.6% at the end of the same quarter a year ago.
The price-to-earnings ratio is way off at 209 when you look at the trailing 12 months, but not all that bad at 21.85 for the forward P/E ratio.
Price-to-book and price-to-sales come in at 1.69 and 2.37, respectively, so the valuations aren’t as bad as they may seem at the surface.
Of all five stocks I’m profiling here today, this one may have the most to gain if gold prices keep clawing upward and it can maintain its course.
Newcrest Mining Limited (ASX: NCM)
Newcrest Mining, at a $17.2 billion market cap, has seen a strong year to date as well. It’s up over 70%.
Unfortunately, it hasn’t really kept up with its peers. Q1 2016 wasn’t good at all.
Revenue came in at US$1.55 billion, down 13% from last year’s US$1.78 billion. Net profit declined to US$81 million, down 55% from last year’s US$180 million.
It has shed assets and cut jobs, but it isn’t showing results from these moves yet.
It is restarting its Indonesian Kencana gold mining now after a four-month suspension, but that is putting the company near the bottom of its 2016 production expectation.
That mine closure involved a collapse and a trapped miner as well. The miner was saved after a little over a week, but safety questions are about as bad as it gets for any mining operation.
Oh, and that followed a death in the Cadia Mine in New South Wales, Australia, in September 2015.
Other aspects of Newcrest look pretty good. All-in sustaining cost is quite low at $770 per ounce, producing a margin of 31%, as of the last half-year report in February.
However, the company isn’t sitting on much cash, and it is going to take it some time to get its troubled operations and balance sheet in order, which is the main priority, and use of cash, at this point.
Long term, this might be a good entry point, but between the mine problems and the company’s Australian stock listing, I think attention — and funds — are better focused elsewhere.
Goldcorp, Inc. (NYSE: GG)
$15.1 billion puts Goldcorp in our fourth slot of this list. Year to date, the stock is up over 52%, putting it behind all the others for share performance, though.
Unfortunately for the company, that isn’t the only way it is falling behind. In the first quarter of 2016, the company failed to impress investors.
It produced 783,700 ounces of gold at $836 per ounce all-in sustaining costs with average realized gold prices of $1,203 in the quarter.
This should have produced a nice profit, but Goldcorp managed to produce a negative $101 million free cash flow. That ain’t all that’s going wrong:
- A meager $80 million in net earnings and $48 million in operating cash flow
- Net cash outflow from a $206 million increase in working capitalization
- Debt increased from roughly $2.5 billion to roughly $2.7 billion while cash fell
Meanwhile, there is an expected 15% drop in gold production for the second quarter, and 2016 production guidance calls for 2.8 to 3.1 million ounces of gold production. 2015 saw 3.46 million ounces produced.
All-in sustaining costs haven’t budged since last year and are expected to fall between $850 and $925 per ounce for this year.
In short, stay away. This company stumbled while the rest of its peers sprung out of the starting block.
Agnico Eagle Mines (NYSE: AEM)
Last, and least as far as its $11.5 billion market cap goes, is Agnico Eagle Mines. Share prices are up over 92% year to date.
Agnico Eagle has been producing some great results, but it has its work cut out for it going forward.
First-quarter results were a vast improvement over fourth quarter 2015. Earnings per share jumped from negative $0.07 to $0.13, beating analyst estimates by a proportionally huge $0.12.
Realized gold price rose $98 to $1,192, while all-in sustaining costs dropped from $813 per ounce to $797 per ounce quarter-to-quarter.
Revenue and cash gained modestly, net income was low but positive, and long-term debt shrunk modestly to roughly $1.06 billion.
The only issue Agnico Eagle Mines faces is its reserves. It saw its gold reserves deplete 5% last year, leaving it with 19.1 million ounces of gold reserves.
With a guidance plan of 1.6 million ounces of gold production per year, its current total mine life is less than 12 years on current reserves.
That is fine, for now, but it has to continue to aggressively address this issue. As Jason pointed out Friday, it made a very wise acquisition that boosted 2015 production to record levels, and has boosted exploration.
I think Agnico is going to perform in line with its peers while its management team hunts around. I’d expect it to go shopping in Canada, where most of its production exists.
Its debt burden is proportionately low, especially compared to its peers. Expect a big, bold move to create a ton of upside for this company and propel it to the front of the pack.
Where They Go From Here
Agnico Eagle isn’t alone in needing some more deposits. In fact, ALL of these companies are facing dwindling production and reserves.
Successful gold mining operations, especially the majors, saw a disproportionate share price increase compared to gold because they finally were able to push past operating costs and saw very large increases in net cash flow and margins.
The gains in the first half of the year will not be replicated in the second. That isn’t to say there isn’t plenty of profit to be made from the gold majors going forward, though.
Barrick, Newmont, and Agnico Eagle all have the capacity to outperform their peers.
Based on current balance sheets, I’d suspect Newmont and Agnico Eagle have the best ability to add high-quality deposits to their reserves. Barrick simply needs more time to dispel debt concerns.
J.P. Morgan is calling on Barrick to invest in junior miners. All three companies have management teams looking to make acquisitions, with Agnico Eagle being the most candid about its needs.
The trick to profiting from the major gold miners is to find the most attractive junior miners out there today, buy their shares, and have the majors pay us for them.
The lean times are over, and the capital destruction is done. Now is when the industry will consolidate and cycle back to stronger margins and profits. We’re seeing the beginning of this trend right now.
This isn’t easy to do, but the experienced analysts out there can consistently find the best acquisition targets out there.
In fact, the Outsider Club recently was lucky to bring aboard Gerardo Del Real to do just that.
He has worked behind the scenes providing research and advice to large institutional players, fund managers, newsletter writers, and some of the most active high net worth investors in the resource space.
Now, he is doing that for his subscribers, and he has already lined up four solid picks that are up 68%, 46%, 14%, and 10% in just one month.
Check out his research here, and keep a close eye on the majors for signs of acquisitions and deals to come.
