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4 Gold Stocks to Watch Despite Gold Prices Losing Steam

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The Zacks Mining - Gold industry is likely to be impacted by drop in gold prices this year and weak demand from top consumer India due to surging coronavirus cases. Vaccine rollouts and strong optimism over economic recovery has put a rein on the rallying gold prices. Notably, the yellow metal had gained 25% in 2020 riding on the back of the COVID-19 pandemic induced safe-haven demand.

Amid the uncertainly, companies like Franco-Nevada Corporation (FNV), Northern Dynasty Minerals, Ltd. (NAK), Galiano Gold Inc. (GAU) and Gold Resource Corporation (GORO) are poised well backed by their strong balance sheets and initiatives to lower costs.

About the Industry

The Zacks Mining - Gold industry primarily comprises big and small companies that are engaged in gold extraction from mines of widely varying types and scale. Notably, gold mining is a long and complex process. Significant exploration and development to evaluate the size of the deposit followed by assessment of ways to extract and process the ore efficiently, safely and responsibly precedes actual mining. On average, it takes between 10-20 years for a gold mine to produce material that can be refined.

The mining, processing, development and mineral exploration activities are subject to several laws governing prospecting, development, production, taxes, labor standards and environmental regulation in various jurisdictions in which these companies operate.

What’s Shaping the Future of Mining-Gold industry

Gold Loses Momentum on Prospects of Economic Recovery: Gold had an impressive run in 2020 gaining 25% primarily fueled by coronavirus pandemic. Apprehensions over global economic growth fueled safe-haven demand for the metal. Unprecedented economic stimulus and low interest rates also favored prices. Gold even shot past the $2,000 an ounce threshold for the first time in August 2020. However, gold prices have trended lower since the start of 2021 and lost 4% of its value so far. Rising US treasury yields, increasingly positive outlook for the economic recovery and vaccine rollouts seem to have dulled its lustre.

Cost Control & Innovation to Increase Efficiency: Mining companies are major consumers of energy with around 50% of their production costs closely linked to energy prices. Meanwhile, the industry has been facing a shortage of skilled workforce that has led to a spike in wages. Moreover, labor-related disputes can be damaging to production and revenues. Since the industry cannot control gold prices, it focuses on improving sales volume, operating cash flow and lowering unit net cash costs. The industry participants are also opting for alternate energy sources in order to minimize fuel-price volatility and secure supply. Miners are now committed to cost-reduction strategies and digital innovation to drive operating efficiencies.

India’s Worsening COVID-19 Crisis to Impact Demand: India and China together account for around 50% of consumer gold demand. Per the World Gold Council, China witnessed the highest jewelry demand in the first quarter 2021 since 2015. China’s economy continues to improve from the pandemic induced slump with GDP attaining 18.3% in the first quarter, consequently demand for gold has increased as well. Meanwhile, India is grappling with the second wave of COVID-19 infections. The country witnesses a spike in gold demand in the second half of the year due to the timing of weddings and key festivals, when buying gold is considered auspicious. This might not be the case this year as various states are imposing lockdowns to control the COVID-19 crisis. This, in turn, will impact gold demand this year.

Impending Demand and Supply Imbalance: The industry players are currently dealing with depleting resources, declining supply in old mines and lack of new mines. Also, owing to scarcity of new discoveries and depleting existing resources, miners are preferring to build up reserves through acquisitions rather than digging for new ones that are inherently risky and capital intensive. On the demand side, use of gold across energy, healthcare and technology is on the rise. Moreover, the yellow metal has long been considered as a safe haven investment in times of financial or political uncertainty. Emerging market central banks are turning their attention to gold after years of exposure to the U.S. dollar, and as a natural currency hedge against other reserve currencies. So, there will be an eventual demand-supply imbalance that is likely to drive gold prices, which bodes well for the industry over the long haul.

Zacks Industry Rank Indicates Dismal Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects in the near term. The Zacks Mining- Gold Industry, which is a 37-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #249, which places it at the bottom 2% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Despite the bleak near-term prospects, we will present a few Mining – Gold stocks that one can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Versus Broader Market

The Mining- Gold Industry has underperformed the S&P 500 Index and the Basic Material sector in a year’s time. While the stocks in the industry have collectively declined 7.5%, the S&P 500 has gained 47.0%. Meanwhile, the sector has rallied 72.5%.

One-Year Price Performance


Industry’s Current Valuation

On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing gold-mining companies, we see that the industry is currently trading at 5.06X compared with the S&P 500’s 15.80X and the Basic Material sector’s forward 12-month EV/EBITDA of 4.51X. 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 9.40X and as low as 4.63X, with median being at 6.78X.

4 Mining-Gold Stocks to Keep an Eye On

Northern Dynasty Minerals: Headquartered in Vancouver, Canada, the company is engaged in the exploration of mineral properties in the United States. The company’s Pebble Project in Alaska is described as “the most significant undeveloped copper and gold resource in the world.” If approved, the project would reportedly be North America’s largest mining operation. Over the estimated 20 years of mining, the Pebble Project as proposed will extract approximately 70 million tons of mineralized material annually at the extremely low strip ratio of 0.12:1.

The Zacks Consensus Estimate for earnings for fiscal 2021 has moved up 11% over the past 60 days. The Zacks Consensus Estimate for the bottom line is currently at a loss of 8 cents per shares, narrower than the prior-year’s loss of 10 cents per share. The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Price & Consensus: NAK




Franco-Nevada Corporation: Based in Toronto, Canada, the company operates as a gold-focused royalty and stream company in the United States, Latin America, Canada, Australia, Europe, and Africa, and internationally. Franco-Nevada appears to be on a promising long-term trajectory backed by a healthy portfolio of streaming and royalty agreements on many properties mined by some of the most reputable mining companies in the world. One of the inherent strengths of its business model is the diversification of portfolio. Franco-Nevada has recently acquired 14.7% of Vale S.A's (VALE) outstanding Participating Debentures and accumulated a 9.9% equity investment in Labrador Iron Ore Royalty Corporation. Both investments provide exposure to mines producing high grade iron ore products. The two transactions further diversify Franco-Nevada's asset, geographic and operator mix. Also, given its continued focus on cost management, the company continues to generate high margins.

It has a long-term estimated earnings growth rate of 4%. The Zacks Consensus Estimate for earnings for fiscal 2021 has been revised upward by 5% over the past 60 days. The consensus mark indicates year-over-year growth of around 20%. The company has a trailing four-quarter earnings surprise of 17.5%, on average. Shares of the company, which carries a Zacks Rank #3 (Hold), have gained 2.7% over the past three months.

Price & Consensus: FNV



Galiano Gold: Headquartered in Vancouver, Canada, Galiano Gold Inc. engages in the exploration, development, and production of gold properties. Its primary asset is the Asanko Gold Mine located in Ghana, West Africa. The mine has exceeded annual production guidance for a second consecutive year in 2020. The company had initiated exploration activity at the Asumura property in Ghana and acquired exploration properties in Mali. The company now has two greenfield projects, both of which are located in prospective geological regions.

The company has a trailing four-quarter earnings surprise of 233%, on average. The Zacks Consensus Estimate for the company’s fiscal 2021 have moved up 28% over the past 60 days. Shares of the company, which carries a Zacks Rank #3, have gained 1.5% in the past six months.

Price & Consensus: GAU




Gold Resource Corporation: Headquartered in Denver, CO, Gold Resource Corporation explores, develops, produces, and sells gold and silver in Mexico and the United States. The company’s focus is on unlocking the value of the Don David Gold Mine mine, existing infrastructure, and large property position. It has plans to make significant investments in Oaxaca, Mexico for infrastructure and exploration in 2021. The majority of the exploration work is expected to be spent on drilling and exploration drifts at the Aguila project with the objective to increase the estimate of proven and probable reserves. Metal production is expected to come in slightly higher compared to 2020 as the company has been focusing on operational excellence and driving improved operating margins.

The Zacks Consensus Estimate for the company’s 2021 earnings has moved north by 250% over the past 60 days. The Zacks Consensus estimate for earnings is currently pegged at 14 cents per shares, against the prior-year quarter’s loss of 9 cents per share. The company carries a Zacks Rank #3.

Price & Consensus: GORO



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VALE S.A. (VALE) : Free Stock Analysis Report

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FrancoNevada Corporation (FNV) : Free Stock Analysis Report

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