After pulling back from the new record highs set earlier this week, gold futures for February delivery (GCG24) are pushing higher again in early trading today. As investors adjust the odds for Fed rate cuts next year, the yellow metal has been gaining momentum due to cooling bond yields and a softer U.S. dollar, coupled with ongoing geopolitical tensions and aggressive purchases of gold by central banks.
Physical gold is a safe haven asset, and is viewed as a store of value as well as a hedge against inflation. Historically, the precious metal has thrived in periods of economic turmoil - which means adding exposure can provide your portfolio with diversification, lowering overall risk.
According to a report from the World Gold Council, 24% of central banks are likely to increase gold reserves in the next year as they expect the U.S. dollar to depreciate. So, if you are bullish on gold, buying gold mining stocks may be a good strategy right now. Typically, mining stocks generate outsized profits when gold prices are elevated, as they benefit from a high operating leverage.
One gold stock under $5 that's trading at a massive discount to consensus price target estimates is Silvercorp Metals (SVM). Let’s take a look at Wall Street's upside forecast.
Silvercorp's Strong Balance Sheet
Valued at $482 million by market cap, Vancouver-based Silvercorp Metals acquires, explores, develops, and mines mineral properties in China. It explores metals such as silver, gold, lead, and zinc and is a company with a 17-year track record.
SVM operates low-cost mines that generate consistent cash flow. Moreover, a strong balance sheet allows it to fund growth opportunities and deliver value to shareholders. The company’s stellar margin profile is among the highest in the mining industry, providing it with the flexibility to strengthen its balance sheet and pursue accretive acquisitions. For instance, Silvercorp has a trailing EBITDA (earnings before interest, tax, depreciation, and amortization) margin of 42%, significantly higher than the industry average of 22%.
With $90 million in operating cash flows in the last 12 months, Silvercorp aims to end 2023 with a free cash flow of $50 million. It also has $189 million in cash and a debt-free balance sheet, which is exceptional for a mining company.
Is Silvercorp Stock a Good Value Buy Right Now?
Down 82% from all-time highs, Silvercorp stock is trading at a steep discount right now. It currently has an EV/EBITDA multiple of 4.3x, much lower than the sector median of 8.08x.
Wall Street expects the company’s earnings to decline slightly to $0.20 per share this fiscal year, before improving 10% to $0.22 per share in fiscal 2025. So, priced at 11.6x forward earnings, SVM is very cheap.
It also offers shareholders an annual dividend of $0.03 per share, indicating a forward yield of 0.9%. With a payout ratio of around 10%, Silvercorp has enough room to increase its dividends significantly, while still investing in growth.
Wall Street Thinks SVM Can Roughly Double
Along with gold hitting new highs, demand for silver is forecast to remain bright due to global decarbonization efforts and electrification, both of which should drive prices higher. That bodes well for Silvercorp going forward.
Out of the three analysts tracking SVM, two recommend a “strong buy,” and one recommends “moderate buy.” The average price target is $5.25, indicating an upside potential of 92% from current levels, while the Street-high target of $6.50 is a 138% premium.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
