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Why Gold Fields Could Outperform

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·5 min read
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Gold price outlook

Global growth this year has already been impacted by the negative effects of the coronavirus outbreak, as the Organization for Economic Cooperation and Development warned on Monday.

In response, the OECD cut its forecast on global GDP growth by 0.5 percentage points to 2.4%, which is the lowest rate since the Great Recession.


To defend the global economy from the threat represented by cutbacks in the manufacturing and service sectors, as well as restrictions to the free movement of goods, services and people, central banks may take action through interest rates cuts and other monetary policies.

The European Central Bank is monitoring the situation and doesn't exclude the possibility of intervening with ad hoc measures to contain the headwinds from the new coronavirus.

In China, the central bank and major lenders also lowered loan rates in February to stimulate the economy, which has been heavily disrupted by the epidemic.

Lower interest rates promote the creation of a favorable environment for investments in gold, as the precious metal serves as a safe-haven investment.

On the tailwinds of this, we may witness a surge in the price of the yellow metal, which traded at $1,594.80 per troy ounce on the Comex futures market and at $1,599.65 per troy ounce on the London bullion market at close on Monday, up 4.8% year to date.

Gold Fields

U.S. publicly traded gold producers offer a compelling way to take advantage of the gold bull market.

Sell-side analysts on Wall Street foresee that American Depositary Receipts of Gold Fields Ltd. (NYSE:GFI) will not only trade higher but will also do better than most competitors in the mining industry. Wall Street analysts have given the stock an overweight recommendation rating with a $7.05 price target, reflecting a 13.7% gain from Monday's price of $6.20.

The South African operator has total gold reserves of almost 50 million ounces and has already topped the industry in the past 52 weeks as the stock soared 60% following a 22% rise in the price of the commodity. Meanwhile, the Van Eck Vectors Gold Miners exchange-traded funds (GDX) was up 26%. The Van Eck Vectors Gold Miners exchange-traded funds index is the benchmark for the industry.

Nonetheless, the stock still appears cheap as its share price trades well below the 50-day simple moving average line and only slightly above the 100- and 200-day SMA lines. The share price is also a bit beyond the middle point of the 52-week range of $3.57 to $7.90.

The price-book ratio of 1.82 is higher than the industry median of 1.33, but the enterprise value-Ebitda ratio, which gold miners' investors also use to ascertain whether a company is cheap or not, scores 5.03 versus the industry median of 8.16.

From its assets located in Chile, Peru, Ghana, South Africa and Western Australia, Gold Fields mined nearly 2.2 million ounces of attributable gold equivalent in 2019, which marked an 8% increase from 2.04 million ounces produced in 2018. The production surpassed the higher limit of the range of the company's guidance of 2.13 million to 2.18 million ounces.

Higher throughput reflected in lower all-in costs (aka AIC) of $1,064 per ounce in 2019, down 9% from $1,173 per ounce in 2018 and below the lower limit of the company's guidance range of $1,075 to $1,095.

Thanks to strong operational performance, the end of large capital expenditures for major projects and higher realized gold price per ounce, the activities generated cash inflows of $249 million in 2019 versus outflows of $122 million in 2018.

The remarkable shift in the yearly result of net cash flow, along with proceeds from the divestiture of non-core assets and the successful refinancing of the debt through the issuance of new bonds and the replacement of old credit facilities agreements, reinforced the balance sheet of Gold Fields. Now it would take approximately one year for the company to repay all the outstanding debt using Ebitda compared to one and a half years as of Dec. 31, 2018.

Gold Fields guides for attributable production of 2.275 million to 2.315 million ounces of gold equivalent at an AIC of $1,035 to $1,055 per ounce, including additional expenditures at the new Salares Norte mining project in Chile (or $975 to $995 per ounce without Salares Norte).

Gold Fields may turn to capital markets to raise funds, perhaps through the issuance of new common stock, to help advancing the Chilean mining project, which is estimated to have a life of about eleven and a half years. The asset should start production of commercial gold in the first trimester of 2023. It will produce 450,000 ounces of gold annually over the first seven years and 355,000 ounces for the first 10 years. The all-in sustain cost is projected to range between $920 and $940 per ounce and capital spending is anticipated at approximately $630 million.

Disclosure: I have no positions in any security mentioned.

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This article first appeared on GuruFocus.