The prospects for the Zacks Mining - Gold industry look bright at the moment on the back of improving gold prices. The yellow metal has been gaining this year on safe-haven demand, fueled by the turmoil in the banking sector, ongoing geopolitical tensions and a challenging economic environment.
With gold prices anticipated to gain further on demand-supply imbalance, companies like Franco-Nevada Corporation FNV, Gold Fields Limited GFI, AngloGold Ashanti AU and Alamos Gold AGI 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 engaged in extracting gold from mines. The mines may either be underground or open pits. Mining is a long and complex process, and requires significant financial resources. It involves exploration to evaluate a deposit's size; assessment of ways to extract and process the ore efficiently, safely and responsibly; and development of 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. The players in the industry nowadays 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.
What's Shaping the Future of the Mining-Gold Industry
Gold Prices Gain Amid Market Volatility: The yellow metal had a lackluster 2022, having lost 0.3% of its value due to a strong U.S. dollar and the aggressive interest rate hikes. Supported by the opening of China’s economy and a less hawkish tone by the Fed’s Jerome Powell, the yellow metal crossed the threshold of $1,959 an ounce in January 2023 — levels last seen in April 2022. Gold prices peaked above $2,000 an ounce in March, fueled by the sudden collapse of Silicon Valley Bank — the largest banking failure since the 2008 financial crisis and the subsequent acquisition of Credit Suisse. These events shook investor confidence, making them flock to gold. The bullion has gained since and peaked at a high of $2,085 an ounce on May 4, aided by U.S. debt ceiling concerns. Gold prices are currently at around $1,980 an ounce, gaining on mixed U.S. job data and a weak dollar, as the US Federal Reserve signaled that it could skip interest rate hikes at its next policy meeting. Overall, gold prices have increased 7.5% so far this year.
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.
India and China to Support Demand: India and China account for around 50% of consumer gold demand. A pickup in demand in China is expected this year, aided by fewer COVID-led disruptions, a cautious economic rebound and a gradual increase in consumer confidence. Retail demand in India is expected to rise on improved consumer confidence and pent-up demand. Also demand for physical gold is seasonally higher in the later part of the year, aided by the festival and wedding season in India. With scarce mining opportunities and modest levels of recycling, India is heavily reliant on bullion imports to meet its domestic demand.
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 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 financial or political uncertainty. Gold demand also 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 39-stock group within the broader Zacks Basic Materials sector, currently carries a Zacks Industry Rank #75, which places it at the top 30% 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 outperformed the S&P 500 Index, as well as the Basic Material sector, in a year. The stocks in the industry have collectively grown 2.4% compared with the S&P 500’s rise of 2.1%. The broader sector has, meanwhile, declined 14.9% in the past year.
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 7.13X compared with the S&P 500’s 11.33X and the Basic Material sector’s forward 12-month EV/EBITDA of 5.94X. 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 being 6.34X.
4 Mining-Gold Stocks to Bet On
Gold Fields: The company’s $6.7-billion acquisition of Yamana in May 2022 created a global gold major, with a diversified portfolio of high-quality, long-life flagship assets across some of the world’s most established gold mining jurisdictions. Per GFI, it has been on track to deliver on its fiscal 2023 guidance of attributable gold-equivalent production between 2.25-2.30 million ounces. GFI continues to look at value-accretive inorganic opportunities to bolster its pipeline. Its proposed joint venture between Gold Fields’ Tarkwa Gold Mine and AngloGold Ashanti’s Iduapriem Gold Mine near Tarkwa in Ghana's Western Region is expected to create the largest gold mine in Africa and one of the largest in the world. It will be a high-quality operation, supported by a substantial mineral endowment and an initial life spanning almost two decades. Further, GFI’s Salares Norte project, which is expected to come into production at the end of this year, will strengthen Gold Fields’ future production profile. Backed by these tailwinds, the company’s shares have risen 64% in the past three months.
The Zacks Consensus Estimate for the Sandton, South Africa-based company’s fiscal 2023 earnings has moved up 1% over the past 60 days. The consensus mark indicates year-over-year growth of 8.3%. GFI currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: GFI
Franco-Nevada: 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 focus on cost management, FNV has been generating high margins. Franco-Nevada has been enhancing its portfolio without adding significant overhead. The company will gain from mine expansions and the construction of mines in the years to come. FNV’s shares have appreciated 9% in the past three months.
This Toronto, Canada-based gold-focused royalty and stream company has a long-term estimated earnings growth rate of 4%. The Zacks Consensus Estimate for earnings for fiscal 2023 has moved up 9.4% over the past 60 days. FNV has a trailing four-quarter earnings surprise of 2.8%, on average. The company currently carries a Zacks Rank #2 (Buy).
Price & Consensus: FNV
AngloGold Ashanti: The company produced 584,000 ounces of gold in the first quarter of 2023 at a total cash cost of $1,204 per ounce. Production was steady year over year. AU continued to make progress on reinvestment in key assets to improve operating flexibility and extend mine lives, while advancing a program to support the tailings storage facility that services the Queiroz plant at the Cuiabá mine complex in Brazil. The company expects to produce 2.45-2.61 million ounces in 2023, with production and costs expected to improve in the second half of 2023, as its Full Asset Potential program (“FP”) continues to deliver. The proposed joint venture with Gold Fields (as mentioned above) will help leverage the operating efficiency advantage at Tarkwa and unlock higher gold grades at Iduapriem. The estimated average annual production is expected to be 900koz per year over the first five years of operation at an all-in sustaining cost per ounce of less than $1,000. Over the remaining life, the average annual production is estimated at 600 koz. Its shares have gained 43% over the past three months.
The Zacks Consensus Estimate for earnings for the Johannesburg, South Africa-based company’s fiscal 2023 has been revised upward by 14% over the past 60 days. The consensus mark indicates year-over-year growth of 50.4%. The company has a long-term estimated earnings growth of 7.4%. AU currently carries a Zacks Rank #2.
Price & Consensus: AU
Alamos Gold: The company produced 128,400 ounces of gold in the first quarter of 2023, marking a 30% year-over-year increase and surpassing its guidance as all three operations performed well. AGI also generated record quarterly revenues and its operating cash flow increased 16% from the fourth quarter of 2022, marking the fourth consecutive quarterly increase. The company expects declining costs to deliver improved margins over the next several years, thereby supporting a strong free cash flow. The company continues to advance on its growth initiatives, with the Phase 3+ Expansion on track for completion in 2026. It has also achieved a permitting milestone with the approval of the Environmental Impact Statement for Lynn Lake, which is an important part of the company’s longer-term growth strategy. The company has recently 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 12% over the past 60 days and indicates 64.3% year-over-year growth from the last year. AGI has a long-term earnings estimate growth rate of 14.9%. It has a trailing four-quarter earnings surprise of 16.7%, on average. AGI currently carries a Zacks Rank #2.
Price & Consensus: AGI
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