The 8% year-to-date drop in gold prices amid rising interest rates and a stronger dollar is a concern for the Zacks Mining - Gold industry. A weak price backdrop combined with labor issues and inflated production costs makes the near-term prospects look dull at the moment for this industry.
With gold prices expected to pick up eventually on demand-supply imbalance, stocks like Barrick Gold Corporation GOLD, Franco-Nevada Corporation FNV, Seabridge Gold, Inc. SA and Vista Gold Corporation VGZ 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 mainly comprises companies that are engaged in extracting gold from mines. The 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, followed by assessing ways to extract and process the ore efficiently, safely and responsibly, and finally, develop the mine before the actual mining process. It normally takes 10-20 years for a gold mine to produce material that can be finally refined. The players in the industry nowadays use a range of sophisticated techniques to extract gold and convert it into doré bars, an alloy of gold and silver, alongside other impurities. These are then sent for purification, following which the gold is purchased in the form of bars or coins or used in jewelry or for other purposes.
What's Shaping the Future of Mining-Gold Industry
Gold Prices on a Downtrend: Dependent on several factors like demand and supply, inflation, movement in the U.S. dollar, interest rates and geopolitical issues, gold prices tend to be volatile. So far this year, the pricing scenario has not been in favor of the yellow metal, having lost 8% of its value and currently languishing at around $1,675 an ounce, near the lowest levels in more than two years against a backdrop of continued higher yields and a stronger US dollar. While rate hikes pose challenges to gold for the rest of the year, continued inflation and geopolitical risks will likely drive demand for gold as a hedge.. Demand for physical gold is seasonally higher in India in the latter part of the year, aided by the festival and wedding season, which will likely help lift prices.
Labor Issues, Higher Costs Persist: The industry continues to face a shortage of skilled workforce, causing a spike in wages. The industry players are persistently grappling with escalating production costs, including electricity, water and materials, and supply-chain issues. Since the industry cannot control gold prices, it focuses on improving sales volume and 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 now committed to cost-reduction strategies and digital innovation to drive operating efficiencies.
Impending Demand and Supply Imbalance: Depleting resources, declining supply in old mines and lack of new mines remain an inherent threat to the industry. Due to scarcity of discoveries and exhaustive existing resources, miners prefer building up reserves through acquisitions rather than digging new ones that are inherently risky and capital-intensive. On the demand side, the use of gold in energy, healthcare and technology is rising. The yellow metal has long been considered a safe-haven investment in times of financial or political uncertainty. Emerging market central banks are turning their attention to gold. So, there will be an eventual demand-supply imbalance that is likely to drive gold prices. This, in turn, bodes well for the industry in the long haul.
Zacks Industry Rank Indicates Dim Prospects
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. The Zacks Mining- Gold Industry, which is a 39-stock group within the broader Zacks Basic Materials sector, currently carries a Zacks Industry Rank #178, which places it at the bottom 29% of 251 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a tepid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since January 2022, the industry’s earnings estimates for 2022 have decreased approximately 21%.
Despite the industry’s drab near-term view, we will present a few stocks that you may want to consider for your portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and its current valuation.
Industry Lags S&P 500 & Sector
The Mining-Gold Industry has underperformed the S&P 500 Index as well as the Basic Material sector in a year’s time. The stocks in the industry have collectively fallen 13.2% compared with the S&P 500 and the broader sector’s decline of 12.5% and 9.6%, respectively.
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 7.73X compared with the S&P 500’s 19.92X and the Basic Material sector’s forward 12-month EV/EBITDA of 6.28X. 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 has traded as high as 9.55X and as low as 5.30X, with the median being at 6.87X.
4 Mining-Gold Stocks to Keep an Eye on
Seabridge Gold: SA ranks first in gold and copper reserves among the major-listed gold companies. Seabridge Gold's principal assets are the KSM and Iskut properties near Stewart, British Columbia, Canada, and the Courageous Lake gold project in Canada's Northwest Territories. It also holds a 100% interest in the Snowstorm project in Nevada, the Iskut project located in northwestern British Columbia and the 3 Aces project located in Yukon. KSM is the world’s largest undeveloped project by gold resources. Per the latest Preliminary Feasibility Study, the project has proven and probable mineral reserves of 47.3 million ounces of gold, 7.3 billion pounds of copper, 160 million ounces of silver and 385 million pounds of molybdenum. Exploration activities are underway at Iskut, pointing toward a potentially large gold-copper porphyry system. The stock has dropped 24.1% in a year’s time, reflecting the plunge in gold prices.
The Zacks Consensus Estimate for SA’s 2022 earnings indicates growth of 84.6% from the year-earlier reported figure. SA has a trailing four-quarter earnings surprise of 87.9%, on average. The stock currently flaunts a Zacks Rank #1 (Strong Buy).
You can see the complete list of today's Zacks #1 Rank stocks here.
Price & Consensus: SA
Vista Gold: VGZ’s flagship asset is the Mt Todd gold project in Northern Territory, Australia. The recently completed Mt Todd feasibility study resulted in a 7-million-ounce gold reserve and a 16-year mine life. If developed as planned, Mt Todd has the potential to become one of Australia’s top 5 gold producers. Vista Gold is currently seeking a partner to maximize its shareholder value from the Mt Todd gold project. VGZ has a strong financial position with no debt on its balance sheet. Also, completion of the exploration drilling program at Mt Todd combined with management’s ongoing efforts to control costs will significantly reduce its expenditures. VGZ’s shares have declined 28.9% in a year’s time in tandem with the decreasing gold price.
The Zacks Consensus Estimate for VGZ’s 2022 earnings indicates growth of 64.3% from the year-ago reported figure. The stock currently has a Zacks Rank #2 (Buy).
Price & Consensus: VGZ
Barrick Gold: Its strong liquidity position and healthy cash flow poise it well to take advantage of attractive development, exploration and acquisition opportunities. Its growth projects, namely Turquoise Ridge third shaft, Goldrush and the Pueblo Viejo plant and tailings expansion are currently on track. These projects are advancing per schedule and within budget, underpinning the next-generation profitable production from the core region. Also, the combination of Turquoise Ridge and Twin Creeks delivers a tier-one asset with another in the making at Goldrush. GOLD has cut its total debt by more than 50% over the past three years, which is commendable and will aid in lowering its interest expenses. Barrick Gold’s shares have declined 16.2% over the past year.
This Toronto, Canada-based entity has a trailing four-quarter earnings surprise of 9.6%, on average. GOLD has a long-term estimated earnings growth rate of 2% and a Zacks Rank #3 (Hold).
Price & Consensus: GOLD
Franco-Nevada Corporation: FNV appears on a promising long-term trajectory, backed by a healthy portfolio of streaming and royalty agreements on several properties mined by some of the most reputable mining companies in the world. FNV is debt-free and uses its free cash flow to expand the portfolio and pay out dividends. Given its continued focus on cost management, FNV continues to generate high margins. Franco-Nevada continues to enhance its portfolio without adding significant overhead. FNV’s shares have fallen 12.8% in a year’s time.
This Toronto, Canada-based gold-focused royalty and stream player has a long-term estimated earnings growth rate of 4%. The Zacks Consensus Estimate for earnings for fiscal 2022 indicates growth of 2.3% from the year-ago fiscal quarter’s reported figure. The currently Zacks #3 Ranked stock pulled off a trailing four-quarter earnings surprise of 1.04%, on average.
Price & Consensus: FNV
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