Thanks to persistently high inflation and ongoing geopolitical uncertainties, the traditional “safe haven” of gold started off 2023 as an attractive investment for investors worldwide. These factors have pushed gold futures prices (GCV23) above the $2,000 level on multiple occasions so far this year.
During the month of August, though, gold has been trending lower alongside riskier assets like stocks - punctuated by the precious metal's longest daily losing streak since March 2017.
In fact, outflows for gold exchange-traded funds (ETFs) have been rising for some time now. According to a report by the World Gold Council, physically-backed gold ETFs experienced net outflows of $2.3 billion in July. Notably, on a YTD basis, global gold ETF outflows stood at $4.9 billion at the end of July, resulting in a cumulative reduction of 84 tonnes.
Consequently, the SPDR Gold Trust (GLD), the largest gold ETF by assets, has gained only 3.4% in 2023 so far. This pales in comparison to the S&P 500 Index ($SPX), which has gained 13.9% over the same period.
However, not all mining stocks are built the same - and while some are outperforming GLD, others are lagging the sector benchmark considerably. Here's a look at three names to know.
Kinross Gold Corporation
Commanding a market cap of $5.67 billion and a dividend yield of 2.6%, Kinross Gold (KGC) is one of the leading gold mining companies in the world. In fact, it is the fifth-largest gold mining company in the world in terms of market capitalization.
KGC has pulled back in August, but still stands out as a pocket of strength in the mining sector. The low-priced stock (under $5 per share, currently) has rallied 15.7% in 2023, outperforming both GLD and the broader S&P 500.
Kinross Gold posted strong results for the latest quarter, as a production increase helped both revenue and earnings surpass estimates. Revenues rose by 22% from the prior year to $1.09 billion, while EPS improved to $0.14, topping the consensus estimate of $0.09. Total production rose to 555,036 Au eq. oz. compared with 453,978 Au eq. oz. in Q2 2022, and results were also supported by a higher average realized gold price of $1,976 per ounce, up 5.56% from the year-ago period.
There was also considerable growth in cash flow from operations, which rose to $528.6 million in Q2 2023 from $257.1 million in Q2 2022. Free cash flow levels also improved to $246.7 million, compared with $107.7 million in Q2 2022. Plus, Kinross Gold reduced its debt to $1.94 billion at the end of the June quarter from $2.56 billion at the beginning of the year.
Looking back, the company has reported earnings growth in three out of the past five quarters, and results surpassed estimates on three out of five occasions, too.
However, on the development front, the company has been quiet in recent times. Its only major announcement came during the first quarter, when it announced an initial mineral resource estimate for its 100% owned Great Bear project located in Ontario, Canada.
Notably, analysts are relatively optimistic about the company's earnings growth. Earnings are projected to grow 80% in the current quarter, and 77.3% in FY 23 overall.
Analysts remain cautiously optimistic about the stock. The consensus maintains a “Moderate Buy” with a mean target price of $5.80, indicating upside potential of about 24.4% from current levels. Out of 13 analysts covering the stock, 7 have a “Strong Buy” rating, 5 have a “Hold” rating and 1 has a “Moderate Sell” rating.
Newmont Corporation
Founded in 1921, Newmont (NEM) is the largest gold mining company in the world, with a market cap of $30.36 billion. The Colorado-based company has operations in gold-rich nations such as the U.S., Canada, Australia, Ghana, Peru, Indonesia, and Suriname.
Despite a healthy dividend yield of 4.2%, total returns on Newmont stock haven't been too robust this year. The stock is down 19.2% in 2023, underperforming GLD by a considerable margin.
For the latest quarter, Newmont posted weak results, as both revenue and earnings fell year-over-year and missed consensus estimates. Revenues for the quarter came in at $2.7 billion, down 12.3% from the previous year. Production fell 17.3% for the period to to 1.24 million ounces - perhaps the most visible reason for the slowdown in revenues. EPS also declined to $0.33 per share from $0.46 in the prior year, widely missing the consensus estimate of $0.43.
Worryingly, both cash flow from operations and free cash flow slipped from the previous year. Cash flow from operations declined by 36.5% from the prior year to $656 million, and free cash flow cratered to $40 million from $514 million.
However, the company reported a 7% yearly rise in the average realized gold price to $1,965 per ounce in Q2 2023. Moreover, debt levels have also remained stable at $5.6 billion from the beginning of the year.
In May, the company announced the $20 billion acquisition of Australian mining firm, Newcrest, subject to regulatory approvals. The proposed merger is set to create the new biggest gold miner in the world, and is expected to aid production and increase efficiencies.
Analysts are expecting earnings to improve by an impressive 107.4% in the current quarter and nearly 80% in the next, resulting in overall 14.1% improvement for FY 2023.
Overall, analysts have recommended a “Moderate Buy” rating on the stock, with a mean target price of $56.97 - indicating upside potential of about 49% from current levels. Out of 16 analysts covering the stock, 10 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 5 have a “Hold” rating.
Pan American Silver Corp.
Canada-based Pan American Silver Corp. (PAAS) is one of the more prominent silver mining companies in the world. The company, which commands a market cap of $3.21 billion, is the largest silver producer in Mexico and Peru. It also has a respectable dividend yield of 2.62%.
However, the company recently made a sizeable investment to bolster its gold footprint with the acquisition of Canadian mining company Yamana Gold for $4.8 billion. The acquisition added four mines to Pan American Silver's portfolio in Argentina, the U.S., Chile and Brazil. Investors cheered the news, as the stock rallied more than 5% following the completion of the deal in March.
More broadly, though, PAAS hasn't impressed with its share price performance. The stock is down 6.6% year-to-date, and well off its April highs above $26 per share.
The company's results for the second quarter left a lot to be desired, as well, as both revenue and earnings failed to surpass expectations. Revenues were up 88% year-over-year to $639.9 million, and EPS for the period came in at $0.04 - up from a loss of $0.03 per share in the year-ago period. However, Wall Street was looking for $648 million in sales on EPS of $0.08.
The higher revenues can be attributed to a 32.8% jump in silver production to 6.02 million ounces. Further, Pan American Silver reported record gold production of 248.2 million ounces, up 93.4% over the prior year. There was an improvement in average realised prices for both silver and gold, too - at $23.45 per ounce ($22.03 per ounce in Q2 2022) and $1,975 per ounce ($1,850 per ounce in Q2 2022), respectively.
Consequently, the company's cash generation capabilities from its operations also received a boost, as Pan American Silver reported net cash generated from operating activities of $117 million, up considerably from $20.8 million in the previous year.
However, the company's rapidly expanding long-term debt remains a concern for the company. The long-term debt has jumped to just a shade over $1 billion at the end of the June quarter from a mere $180 million at the start of the year. Such a massive uptick in debt in a short period of time amid a high-interest rate environment is a legitimate point of concern for investors as the company looks to keep making progress back toward profitability.
Analysts seem to be quite upbeat about the earnings growth prospects for post-acquisition Pan American Silver, forecasting a whopping 1,200% EPS growth for the current quarter and overall growth of 377.8% in FY 2023.
Overall, analysts have handed out a rating of “Strong Buy” for the stock, with a mean target price of $23.77 - indicating an upside potential of about 15.4% from current levels. Out of 6 analysts covering the stock, 5 have a “Strong Buy” rating, and 1 has a “Moderate Buy” rating.
Valuations
On a price/earnings (p/e) ratio basis, the gap between Newmont and Kinross when compared to Pan American Silver is considerable. While Newmont and Kinross are trading at relatively reasonable forward p/e ratios of 18.91 and 11.89, respectively, Pan American's p/e is at a steep 179.41.
Likewise, KGC's price/cash flow (p/cf) ratio of 3.96 is lower than Newmont's at 11.56, and far below Pan American Silver's 50.20.
At 1.46, the price/sales ratio for Kinross is the lowest among the three. Newmont trades at a p/s of 2.71, while Pan American is trading at a p/s of 2.18 - roughly in line with its competitors.
Final Takeaway
Macroeconomic uncertainties aren't going away anytime soon, as investors continue to eye the ongoing conflict in Ukraine, rising tensions with the U.S. and China, and the potential for more Fed rate hikes. Consequently, tactical exposure to mining stocks can be a prudent move in response to the latest pullback in gold - but the further removed investors get from spot gold prices and gold futures, the more variables there are to influence returns.
Out of the three stocks highlighted above, Kinross looks like the strongest pick - with the most attractive valuations - for those looking to build positions in the space. On the other hand, Newmont and Pan American Silver have reported softer operating results, yet have remarkably high earnings estimates from analysts - setting up both stocks for continued share price underperformance.
On the date of publication, Pathikrit Bose 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.
