|Kiplinger.com, Spring, 2019. This article was written with Ken Berman, founder of Gorilla Trades. It was part of a series of articles developed under an agreement with Kiplinger negotiated by me to designate Mr. Berman as a contributor and to deliver original articles for them on a regular basis.|
Gold prices have endured an up-and-down 2019 that has seen the yellow metal surge for the first couple months before sliding to a slight year-to-date loss. Still, gold stocks – the mining companies that actually produce the shiny commodity – are worth a look right now.
A little exposure to gold can help your portfolio. And one way to get that exposure is via mining companies, whose results are heavily tied to the metal’s price but can also stand out from one another based on their management, operational efficiency and economies of scale.
Prices, while slightly lower this year, remain well off their two-year lows set in August 2018, sitting roughly in the middle of their three-year range. Moreover, gold and gold stocks remain a hedge against market, economic and geopolitical turmoil here and abroad. Choose your catalyst: failure to reach a trade deal with China, saber-rattling on the Korean peninsula, a no-deal Brexit, new Russian incursions. Any of these could help gold regain its moxie.
Here are five gold stocks to buy to take advantage of additional sparks in the yellow metal. All five stand out as some of the best operators in the space, and all do something that gold itself can’t do: pay cash dividends.
(1/5) Newmont Goldcorp
- Market value: $24.5 billion
- Dividend Yield: 1.9%
In April, Newmont Goldcorp (NEM, $29.94) and Goldcorp shareholders approved the former’s $10 billion takeover of the latter. The combination has created what should be the world’s largest gold producer and currently is the largest player among gold stocks (by market value).
The deal’s architects were so confident of the potential synergies that they dangled an 88-cent-per-share special dividend as a reward if shareholders OK’d the pairing. To put this into context, 88 cents is roughly six quarters’ worth of Newmont Mining’s regular dividends.
What is now Newmont Goldcorp likely will become the industry leader, with management projecting 6 million to 7 million ounces of annual gold production.
Newmont has an impressive pipeline of projects coming on line. The most recent, and most notable, is a joint venture with giant Barrick Gold (GOLD) after a failed merger bid. While Newmont was trying to buy Goldcorp, Barrick launched a hostile bid for NEM that included breaking off its pursuit of Goldcorp. However, Barrick capitulated and instead agreed to a JV that will combine the pair’s Nevada assets, significantly reducing costs.
Bank of America analysts have a “Buy” rating on the stock, citing “Newmont’s impressive pipeline of production replacement projects, strong forecast free cash flow generation and a solid balance sheet with a below industry average net debt to EBITDA ratio.”
(2/5) Kirkland Lake Gold
- Market value: $6.5 billion
- Dividend yield: 0.4%
- Kirkland Lake Gold’s (KL, $30.90) stock has been on a tear compared to most of the industry. Shares have jumped 72% over the past year while the VanEck Vectors Gold Miners ETF (GDX) has lost more than 9%.
The bullish sentiment around Kirkland concerns its two primary assets: the Fosterville Mine in Victoria, Australia, and the Macassa Mine in Ontario, Canada. While Kirkland operates seven mines, these two accounted for 82.4% of 2018’s 723,701 ounces of production. (Across production improvements from all of its mines, KL is on track to hit production of 1 million ounces of gold in 2019.)
Australia’s Fosterville is driving the bulk of Kirkland’s growth. For the first quarter of 2019, total gold production at Fosterville was 128,445 ounces, slightly more than doubling what it produced in the year-ago quarter. Fosterville offers multiple opportunities to extend existing mining operations as well as adding new mining lines within the site. Kirkland forecast 550,000 to 610,000 ounces of production at Fosterville in 2019 following 356,000 ounces last year. Guidance for the Fosterville mine levels off in 2020, but Kirkland has a history of raising estimates.
Fosterville’s strength drove a fantastic first quarter from an operational standpoint. The company reported record profits (+114% year-over-year) and free cash flow (+85% YoY). That sparked the company to juice its dividend by 34% to 4 cents per share. While the yield will remain modest – it will go from just below 0.4% today to above 0.5% as of the new payout – it’s a strong vote of confidence.
BMO Capital Markets has a “Market Perform” rating (equivalent of “Hold”) on this gold stock, but a price target of $50. An upside scenario of $60 is possible, too.
“As part of the St. Andrew acquisition, Kirkland Lake acquired a very large land package,” BMO’s analysts write. “Exploration success could add value to the stock. Now that the Newmarket Gold transaction is complete, further exploration success at Fosterville may act as a catalyst as well.”
(3/5) Agnico Eagle Mines
- Market value: $9.6 billion
- Dividend yield: 1.2%
Toronto-based Agnico Eagle Mines (AEM, $40.88) is primarily a gold miner that also produces silver, copper and zinc. It has eight mines across Canada, Finland and Mexico, with additional exploration-and-development activities in the U.S. and Sweden.
Agnico is something of a turnaround opportunity. AEM shares have languished against a weak year – 2018 production of 1.6 million ounces, while above guidance, was off 5% from 2017. However, Agnico is guiding 1.75 million ounces of gold production for this year, then 2 million ounces in 2020. Even better for investors: Agnico is forecasting its cost to produce an ounce of gold to stabilize and then decline through 2021.
“After the first quarter, we’re tracking extremely well towards that target and we’ll be revisiting those numbers in our second quarter update in late July as we move through the commissioning of both Meliadine and Amaruq,” CEO Sean Boyd said during the first-quarter earnings conference call.
Agnico also sweetened the pot for shareholders in February when it improved its dividend by 13.6% to 12.5 cents per share.
CFRA analysts, who rate Agnico a “Strong Buy,” write, “AEM has a track record of strong execution and AEM operates in favorable jurisdictions, which help justify AEM’s valuation premium compared to peers.”
(4/5) Barrick Gold
- Market value: $22.1 billion
- Dividend yield: 1.3%
- Barrick Gold (GOLD, $12.60), which owns gold mines worldwide, was until not too long ago the world’s largest gold producer. Newmont Mining’s rejection of Barrick’s bid, followed by its buyout of Goldcorp, has changed that … but there’s still plenty to like about Barrick.
The diversity of Barrick’s global portfolio — from Asia to north and south America, Africa and the Middle East — provides investors a much higher degree of insulation from political and regulatory risks that are part and parcel of investing in gold stocks.
And Barrick hasn’t been completely shut out on the M&A front. Its $6.5 billion acquisition of Randgold in September 2018 bolstered its portfolio and left it with five of the world’s 10 lowest-cost gold mines. Morningstar analyst Kristoffer Inton pointed out after the buyout that Barrick has more than 10 mines producing more than 200,000 ounces of gold each – the entire production of many mid-tier producers. Moreover, the mines associated with the Randgold deal “helps offset production declines in Barrick’s legacy portfolio with costs at or below the company average,” Inton writes.
There’s also the Newmont-Barrick JV to consider. The companies say they can reduce costs in their Nevada mines by $500 million in the first five years and $5 billion over 20 years. Prior to the Randgold acquisition, Nevada minds accounted for 40% of the company’s revenues.
(5/5) AngloGold Ashanti
- Market value: $4.7 billion
- Dividend yield: 0.6%
Johannesburg, South Africa-based AngloGold Ashanti (AU, $11.42) is among the largest gold stocks in the world. Its operations in nine countries produced 3.4 million ounces of gold in 2018, putting it behind only Newmont and Barrick.
Bulls like AngloGold because the redevelopment of its Obuasi mine in Ghana portends meaningful new production at lower costs while shifting the company away from what many feel is an over-concentration of mining in South Africa. Political instability, recently implemented and restrictive mining rules, and a strengthening South African currency has diminished the appeal of doing business there.
What tends to give investors pause are the company’s production costs, which are higher than its peers. But for 2019, AngloGold guided to cash costs of $730 to $780 per ounce, which would represent a decline of between 5.5% and 1%. That’s a step in the right direction – Morningstar’s Inton writes, “Progress on cost reductions is better we had previously forecast” – and more could be on the way. In September, AngloGold replaced CEO Srinivasan Venkatakrishnan with Barrick Gold President Kelvin Dushnisky, who presided over cost reductions at Barrick.