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3 Gold Stocks to Watch in a Promising Industry

The prospects for the Zacks Mining - Gold industry look bright at the moment on the back of improving gold prices. The yellow metal is likely to gain, fueled by ongoing geopolitical tensions as well as strong demand.

With gold prices anticipated to gain further on demand-supply imbalance, companies like Alamos Gold AGI, Orla Mining ORLA and Eldorado Gold EGO are well-poised for growth, backed by their strong balance sheets, efforts to lower costs and growth initiatives.

About the Industry

The Zacks Mining - Gold industry comprises companies engaged in extracting gold from mines. These mines may be either underground or open pits. Mining is a long and complex process and requires significant financial resources. It involves exploration to evaluate the deposit's size, then assessing ways to extract and process the ore efficiently, safely and responsibly and develop the mine before the actual mining process. It normally takes 10-20 years for a gold mine to produce material that can finally be refined. Nowadays, industry players use a range of sophisticated techniques to extract gold and convert it into dore bars, an alloy of gold and silver, alongside other impurities. These are then sent for purification, after which gold is purchased as bars or coins or used in jewelry or other purposes.

Major Trends Shaping the Future of the Mining-Gold Industry

Upbeat gold prices: Gold prices held their ground at above $1,900 per ounce through a major part of the third quarter of 2023, aided by a weaker dollar and increased buying by central banks. Even though gold prices had dipped near the end of the quarter, falling below $1,850 an ounce, the Federal Reserve indicates that interest rates are likely to remain higher for longer. Nevertheless, the average gold price for the quarter was at around $1,928.50 per ounce, which was 12% higher on a year-over-year basis. Gold prices have picked up again, notching a 6.8% gain in October, mainly driven by safe-haven buying due to the geopolitical flare-up in Israel. Year to date, gold prices have gained 6.4%. Gold has also recently gained support after Moody’s lowered its U.S. credit rating outlook from stable to negative, citing increasing fiscal deficits and political standoffs in Washington.

Efforts to Counter High Costs to Sustain Margins: The industry has been facing a shortage of skilled workforce, causing a spike in wages. Industry players are persistently grappling with escalating production costs, including electricity, water, and material and supply-chain issues. Since the industry cannot control gold prices, it focuses on improving the sales volume and the operating cash flow and lowering unit net cash costs. The industry participants are opting for alternate energy sources, such as solar or wind farms, to minimize fuel-price volatility and secure supply. Miners are committed to cost-reduction strategies and digital innovation to drive operating efficiencies.

Impending Demand and Supply Imbalance to Support Prices: Depleting resources, declining supply in old mines and the lack of new mines remain inherent threats to the industry. Due to the scarcity of discoveries and exhaustive existing resources, miners prefer building up reserves through acquisitions rather than digging new ones that are risky and capital-intensive. On the demand side, the use of gold in energy, healthcare and technology is rising. India and China account for around 50% of consumer gold demand. Economic and geopolitical uncertainty is driving safe-haven demand in China, while economic strength in India is yielding wealth-driven buying. Also, demand for physical gold is seasonally higher in the later part of the year, aided by the festival and wedding season in India. Holiday-related spending is expected to boost jewelry demand in China. The yellow metal has long been considered a safe-haven investment in financial or political uncertainty. Gold demand continues to be on the rise from central banks. Therefore, there will be an eventual demand-supply imbalance, which is likely to drive gold prices.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. The Zacks Mining - Gold Industry, which is a 38-stock group within the broader Zacks Basic Materials sector, currently carries a Zacks Industry Rank #88, which places it in the top 35% of 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Versus S&P 500 & Sector

The Mining-Gold Industry has underperformed the S&P 500 Index but outperformed the Basic Material sector in a year. The stocks in the industry have collectively declined 1% compared with the broader sector’s fall of 4%. The S&P 500 has gained 12.2% in the same timeframe.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month EV/EBITDA, a commonly used multiple for valuing gold-mining companies, we see that the industry is currently trading at 5.74X compared with the S&P 500’s 10.64X and the Basic Material sector’s forward 12-month EV/EBITDA of 5.97X. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Over the last five years, the industry traded as high as 9.26X and as low as 4.63X, with the median at 6.40X.

3 Mining-Gold Stocks to Keep an Eye On

Orla Mining: The company recently reported that gold production was 32,425 ounces in the third quarter of 2023, bringing its year-to-date production to 87,393 ounces, driven by better-than-expected performance at Camino Rojo. The Camino Rojo Oxide Gold Mine achieved quarterly gold production of 32,425 ounces of gold in the quarter at an average ore stacking rate of 19,205 tons per day. Backed by this, ORLA increased 2023 gold production expectations to a range of 110,000 to 120,000 ounces from its previous guidance of 100,000 to 110,000 ounces.  The company continues to advance exploration activities across the portfolio with a total investment of $35 million, which continues to generate strong results. With a 10-year mine life and scope of extending through exploration, the Camino Rojo mine is expected to be a significant cash generator in the future.

The Zack Consensus Estimate for earnings for the current year for this Vancouver, Canada-based company has moved up 19% over the past 90 days. It has a trailing four-quarter earnings surprise of 85.4%, on average. ORLA currently carries a Zacks Rank #1 (Strong Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Price & Consensus: ORLA

Alamos Gold: The company produced 135,400 ounces of gold in the third quarter of 2023, marking a 10% year-over-year increase and surpassing its guidance of 120,000-130,000 ounces. Strong performances from the Mulatos District and Island Gold aided this outperformance. This takes the company’s year-to-date output to 399,800 ounces, which puts it on track to deliver record production numbers in 2023. AGI’s efforts to lower costs will help in providing improved margins over the next several years, thereby supporting a strong free cash flow. The company continues to advance on its growth initiatives, including the Phase 3+ Expansion at Island Gold and the Lynn Lake and PDA projects. In August, the company reported the results of an updated Feasibility Study for the Lynn Lake project, which suggests higher average annual gold production of 207,000 ounces over the first five years and 176,000 ounces over the initial ten years — a 23% increase from the 2017 study. In May 2023, the company completed the previously announced acquisition of Manitou Gold Inc. Through this deal, AGI more than tripled its land package around the Island Gold Mine and added significant exploration potential in a relatively underexplored segment of the Michipicoten Greenstone Belt.

The Zacks Consensus Estimate for the Toronto, Canada-based company’s 2023 earnings has moved up 21% over the past 90 days. The current estimate indicates an 85.7% year-over-year increase. AGI has a long-term earnings estimates growth rate of 20.1%. It has a trailing four-quarter earnings surprise of 25.6%, on average. AGI currently carries a Zacks Rank #2 (Buy).

Price & Consensus: AGI

Eldorado Gold: The company produced 121,030 ounces of gold in the third quarter of 2023, up 2% year over year, driven by an enhanced materials handling circuit at Kisladag, productivity initiatives and associated improvements at Olympias. At its development project, Skouries, the company continues focusing on construction ramp-up and completing engineering and procurement in the third quarter. Underground development continued to advance the west decline. It is on a plan to reach the targeted development meters for 2023, while major earthworks initiatives include haul road construction to build earthworks structures as well as civil works related to the crushing facility. The project cost and schedule are on track, with commissioning in mid-2025 and commercial production at the end of 2025.

Eldorado Gold is based in Vancouver, Canada. The Zacks Consensus Estimate for the company’s fiscal 2023 earnings has moved up 11% over the past 90 days. The estimate indicates year-over-year growth of 720%. The company has an estimated long-term earnings growth of 51.6%. EGO has a trailing four-quarter earnings surprise of 496%, on average and currently carries a Zacks Rank #3 (Hold).

Price & Consensus: EGO

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