Let’s talk about gold. The precious metal is the traditional safe haven investment, backed by its use – starting 5,000 years ago – as a reliable store of value. Investors looking to protect their portfolio and secure their wealth traditionally bought heavily into gold, and the price of gold has sometimes been used as a proxy (albeit an inverse one) for general economic health.
In a recent report, investment firm J.P. Morgan took a long look at the state of the gold industry – specifically, the gold mining industry. Analyst Tyler Langton points out an underlying paradox in two basic facts about gold mines.
“Over time, in a commodity business, the lowest cost producers with the longest life assets tend to be the relative winners… Gold mines, when compared to base metals, typically have much shorter mines (sic) lives, and the gold miners have to focus on replacing reserves to maintain levels of production,” Langton noted.
At first glance, Langton’s paradox may seem to point away from heavy investments in gold mines. After all, these are high-risk commodity producers. But current times are actually pretty good for gold miners. Prices are elevated compared to recent years; the metal is running just under $1,800 per ounce now, but it peaked above $2,000 in August of last year, at the height of the corona shutdowns, and it was as low as $1,200 just 18 months ago. The current high prices bode well for producers.
Langton states his belief that there is support for current prices, with gold and gold mines being seen as a hedge against ‘macro uncertainty.’ He believes that the main sources of support will be found in “real interest rates remaining lower for longer and COVID-19 related stimulus measures continuing to expand central bank balance sheets.”
With this in the background, Langton and his colleagues have begun selecting the gold mining stocks they see as winners in the current environment. Unsurprisingly, they like the companies that show discipline on M&A activity, a focus on free cash flow, and solid returns to shareholders.
Using the TipRanks database, we’ve pulled up the details on several of their recent picks. Are they as good as gold? The analysts seem to think so; all are Buy-rated and potentially offer significant upside. Let’s dig in.
Kinross Gold Corporation (KGC)
First up, Kinross Gold, is a mid-cap company– valued at $8.6 billion – with active mining operations in the US, Brazil, West Africa, and Russia. Taken together, these operations have proven and probable gold reserves of 29.9 million ounces. The company is guiding toward 2.4 million ounces in total production for 2021, rising to 2.9 million ounces by 2023. The company’s profitability can be seen by cost of sales per ounce, at $790, and the all-in sustaining cost, at $1,025 per ounce. With gold currently selling at $1,782 on the commodity exchanges, Kinross’s near-term success is clear.
Two sets of statistics highlight Kinross’ profitability. First, the company’s recent record of quarterly results shows steadily rising revenues and earnings. Aside from a dip in 1Q20, at the start of the corona crisis, Kinross’ revenues have been gaining steadily since the start of 2019 – and even in 2020, every quarter showed a year-over-year increase.
After 7 years without dividend payments, Kinross used its strong performance in recent months to restore the company dividend. Payments are still made irregularly, but since announcing in September 2020 that the dividend would be reinstated, two payments have been made and a third has been announced for March of this year. Each payment has been for 3 cents per share, which translates to a modest yield of 1.6%. The key point here is not strength of the yield, but rather, the confidence that management has displayed in the near- to mid-term by restarted dividend payments. Based on current production projections, the payments are expected to continue until 2023.
Tyler Langton, in his notes on Kinross, comes to a bullish conclusion: “Given its expected growth projects and pipeline of additional projects, we think Kinross will be able to maintain average annual production of 2.5mm oz. over the next decade. The company has an attractive cost profile, and we expect costs to decrease over the next several years. The company should also generate attractive strong levels of FCF at current gold prices, and we expect Kinross to direct this cash toward internal growth projects and its dividend.”
In line with these comments, he selects Kinross as JPM’s ‘top pick in the gold sector,’ and rates the stock as Overweight (i.e., a Buy). His $11 price target suggests a 61% upside potential in the coming year. (To watch Langton’s track record, click here)
Kinross gets a Strong Buy recommendation from the analyst consensus, based on a 6 to 2 split between the Buy and Hold reviews. Wall Street’s analysts have set an average price target of $11.25, slightly more bullish than Langton’s, and implying a one-year upside of 64% from the current trading price of $6.85. (See KGC stock analysis on TipRanks)