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Gold Stocks: What to Watch in 2018

Maxx Chatsko, The Motley Fool

Gold has been a store of value for thousands of years -- and that won't be changing anytime soon. So although cryptocurrencies are shining right now, certain investors will always have an affinity for precious metals stocks.

After a rough several years for the broader industry accompanied by excessive mining costs and declining production, several gold companies are poised to realize lower production costs and see past growth investments payoff in 2018 . Others will be stuck with declining production until new mines can pick up the slack in future periods, if they can be so lucky. Simply put, it's been a bumpy ride, but it's not over yet. Here's what to watch in gold stocks in the year ahead.

Tiny fragments of gold sitting on a rock.

Image source: Getty Images.

The largest gold mining stocks

Mining behemoths Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM) failed to beat the total returns of the S&P 500 in 2017, posting a 9% loss in value and 11% gain, respectively, with dividends included. Historically speaking, gold stocks rarely beat the returns of the broader market over most time periods, so this isn't very surprising. But the stock charts could be a little misleading for what lies ahead.

Barrick Gold paid off $1.48 billion in debt through the first nine months of 2017 -- exceeding its annual target of $1.45 billion with plenty of time to spare. The furious pace of debt repayments in recent years has the gold miner on pace to lower the debt on its balance sheet from $13 billion at the end of 2014 to just $5 billion by the end of fiscal 2018. That better positions the company to respond to market volatility and invest in future growth.

The company is also making strides with new digital mining operations in Nevada, which have dramatically lowered all-in sustaining costs, or AISC, per ounce. Additionally, it made progress in settling a long-standing dispute between the Tanzanian government and Acacia Mining, in which it owns a 64% stake. The mining company was presented with a $190 billion (yes, with a "b") bill for back taxes and other fines. While the final total paid is unlikely to approach that figure, the uncertainty has been a major headwind for both companies. It may be the biggest thing to watch for Barrick Gold in 2018. 

Newmont Mining stock fared a bit better than its large peer last year, but still struggled to eclipse the S&P 500. While it boasts higher AISC per ounce than Barrick Gold at the moment, it ended the third quarter of 2017 with nearly $1 billion more in cash and $2.5 billion less debt than its peer. That could explain its relatively favorable treatment from investors.

Management also provided optimistic expectations for 2018 and beyond at an investor day in December. The notable highlights from the world's largest gold mining company include: 

Metric

2018 Expectations

2019 Expectations

AISC

AISC between $965 per ounce and $1,025 per ounce, compared to the prior range of $950 to $1,050 per ounce.

AISC between $870 per ounce and $970 per ounce.

Production

Production guidance increased to 4.9 million to 5.4 million ounces, up from 4.7 million to 5.2 million ounces.

Production to remain at 2018 levels this year and in the range of 4.6 million to 5.1 million ounces per year through 2022.

Data source: Newmont Mining. AISC = all-in sustaining costs.

Maintaining a healthy level of production for the next five years and reducing costs promise to boost an already strong cash flow and balance sheet. That puts Newmont Mining on solid footing for investors looking to invest in gold stocks.

A giant truck unloading raw earth from a mine.

Image source: Getty Images.

The rest of the pack

Investors have quite a few medium- and smaller-sized gold stocks to choose from as well. Yamana Gold (NYSE: AUY) has gifted shareholders with some of the worst returns in the industry in recent years, but has some of the best growth prospects. That may be why the stock erupted last December for a 21% gain.

It promises to be a solid 2018 campaign. Not only is Yamana Gold poised to beat its full-year 2017 guidance, but it's also about to realize major production gains from its Cerro Moro mine in Argentina. The asset will deliver year-over-year production growth of 9.5% for gold and 111% for silver, to 1.03 million ounces and 10 million ounces, respectively, with additional gains in 2019. Assuming production targets are met and sustainable profits are delivered in the upcoming quarters, the stock could be ready to run in the year ahead. 

Fellow gold and silver miner SSR Mining (NASDAQ: SSRM) had a rough 2017 by comparison -- and looks likely to lag behind the performance of Yamana Gold in 2018 as well. That's because the miner will be forced to live with declining production from its three major mines in the year ahead. The good news is the Chinchillas Project is expected to start up in the second half of 2018. The bad news is investors will have to wait for 2019 and beyond to capture the performance increase provided, if any is provided at all.

A gold bullion with tinier gold fragments next to it.

Image source: Getty Images.

Not all gold stocks will be so lucky as to have declining production as their only problem this year. Hecla Mining (NYSE: HL) doesn't appear to be nearing a breakthrough in its labor dispute with union workers, which has knocked the Lucky Friday mine offline since March 2017. Worse yet, its remaining mines aren't doing shareholders any favors, with declining production and increased costs. While a compromise to bring Lucky Friday back up is technically a potential catalyst, investors shouldn't bet on it.

And despite a wild ride in late 2016 and early 2017, shares of Northern Dynasty Minerals (NYSEMKT: NAK) ended up losing 14.5% last year. The Pebble Project in Alaska is certainly oozing with potential on paper, but realizing that potential is already proving difficult in the early stages -- and the mine isn't even expected to be producing until 2024. Management missed its own deadline to find new deep-pocketed partners to aid in development and production, then announced new plans for a significantly smaller mine.

Similar to Hecla Mining, there are several potential catalysts on the horizon for Northern Dynasty Minerals stock, but I think its long-term potential will never be realized.

A man holding fragments of gold over soil.

Image source: Getty Images.

Don't forget streaming companies

Who said you need to mine gold to play in the space? Royalty and streaming companies Royal Gold (NASDAQ: RGLD) and Franco-Nevada Corporation (NYSE: FNV) simply purchase the rights to precious metals produced by the gold stocks wearing hard hats, then sit back and watch the cash flow accumulate. Both stocks crushed the S&P 500 in 2017, with returns of 31% and 35%, respectively, and are poised for healthy returns in the future.

Royal Gold reported record levels of revenue, net income, and operating cash flow in its fiscal 2017. It increased its dividend payment yet again, and is looking forward to starting up a massive gold and silver mine in Canada in the year ahead that will more than double its annual silver production. While declining production and maturing streaming agreements are something to keep an eye on, 2018 could be the company's best year yet.

Similarly, Franco-Nevada shareholders should have relatively little to complain about this year, although the biggest gains may be farther off. A major growth investment in First Quantum's Cobre Panama precious metals mine should begin paying big dividends... in 2019. The mine is nearly completed, but won't be commissioned until late 2018. As my Foolish colleague Reuben Gregg Brewer noted, when production does start, the streaming company "will be able to purchase gold and silver at 20% of their spot prices until certain production levels are met, then at 50% of spot prices thereafter."

There's an added angle to investing in Franco-Nevada: Management has invested in oil and natural gas streaming rights in recent years. That looks like a smart move with the current trend in energy prices. Indeed, the company thinks the revenue from its oil and gas streams could more than double between 2016 and 2021. 

What does it mean for investors?

Of course, much of the direction gold stocks take in 2018 will be determined by gold and silver prices. I didn't mention them for two reasons. First, it's much more important for investors to focus on the operational improvements and financial health of gold companies. For instance, if gold prices fall 5% in the next year but a company reduces its AISC by 15%, then the gold miner comes out ahead.

Second, no one can predict the future. But recent trends for the gold stocks above provide ample clues for what to watch in 2018.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.