2021 was a year to forget for investors in the precious metals space, with the Gold Miners Index (GDX) down more than 10%, giving up a large portion of its 2020 gains. Unfortunately, 2022 hasn't been much better, given that the GDX is in negative territory yet again, down 4% year-to-date. This has prolonged what's already been a violent 18-month bear market in the GDX, with many names down as much as 50%.
The good news among the carnage is that valuations in the space are now at their most attractive levels in years, and while the GDX is down year-to-date, it's slightly outperforming the S&P-500 (SPY). This outperformance is showing up at a critical point, with the GDX sitting at a critical support area vs. the S&P-500 and an area where it's seen a strong recovery in the past. In this update, we'll look at three names likely to outperform the GDX that look like attractive buys at current levels.
(Source: TC2000.com)
One of the best ways to gain exposure to the gold price (GLD) is the Gold Miners Index (GDX), but the issue with owning the GDX is that more than 60% of the constituents are not worth owning. This is because they do not have a track record of production growth per share, some are poorly run, and many are seeing their margins pinched by inflationary pressures. Therefore, I see the best way to gain leverage to the gold price being individual gold miners. The problem is that selection is paramount, and one must ensure that they own the best names. I believe Nomad Royalty (NSR), SSR Mining (SSRM), and Agnico Eagle Mines (AEM) all are superior to most of their peers, and we will discuss why they are worthy of investment below:
Beginning with SSR Mining, the company was one of the few producers to meet the top end of its production guidance range and beat its all-in sustaining cost guidance. As reported two weeks ago, the company produced ~794,500 gold-equivalent ounces at all-in sustaining costs [AISC] of $982/oz, which came in below its already lowered guidance range of $1,000/oz to $1,040/oz. These exceptional results were helped by adding the Copler Mine to the company's portfolio last year, with the company merging with Alacer Gold.
If we look ahead to 2022, SSR Mining expects to produce 740,000 GEOs at the mid-point at higher costs, partially due to higher sustaining capital and inflationary pressures. While this may appear a little disappointing, it's important to note that SSR Mining has been very generous in returning capital to shareholders and plans to increase its exploration budget meaningfully on a year-over-year basis. This is evidenced by a 5% buyback program that the company executed successfully last year, a 40% dividend increase in 2021 despite gold price weakness, and a more aggressive exploration/resource development budget ($54 million).
Assuming the company follows through on its 40% increase, its annualized dividend yield will be $0.28, translating to a nearly 2.00% dividend yield. However, while these developments are great, it's the valuation that makes SSR Mining so compelling. This is because the stock trades at a nearly 11% free cash flow yield, should pay a ~1.80% dividend yield, and trades at a discount to net asset value. Based on what I believe to be a fair value of $22.00 per share, I see more than 33% upside from current levels, making SSRM a Buy on weakness.
Moving to the next name on the list, Agnico Eagle Mines has recently completed a mega-merger with Kirkland Lake Gold to create one of the world's largest gold producers. While there are already many options for investors hungry to invest in million-ounce producers, AEM differentiates itself in multiple ways.
The first is its exposure to only Tier-1 ranked jurisdictions, except for 5% of production coming from Mexico. The second is that it has some of the lowest costs sector-wide, with all-in sustaining costs estimated to come in at less than $950/oz in 2023. The third, and perhaps most important, is that it has meaningful organic growth, with the potential to increase production from ~3.4 million ounces in FY2022 to ~4.5 million ounces by FY2028.
This expected sharp increase in total production comes from organic growth at current mines and the expectation that new projects will come online. New projects in the hopper include Upper Beaver and Santa Gertrudis, two advanced-stage projects in Canada and Mexico. Within the existing portfolio, Detour Lake is expected to steadily ramp up to more than 850,000 ounces per annum, while Macassa's annual production is projected to grow to 400,000+ ounces (FY2021: production ~210,000 ounces).
For those unfamiliar, it's very difficult to find companies with meaningful growth in the million-ounce producer space, which is why AEM is so attractive relative to its peers. In fact, most large million-ounce producers have a track record of moderate reserve (inventory) depletion and relatively flat production, but AEM checks all the boxes with high margins, high growth, and a very attractive valuation. Based on what I believe to be a fair value above $70.00 per share, I see more than 50% upside from current levels, and AEM is one of my favorite ideas in the space.
The last name on the list is Nomad Royalty (NSR), a small-cap royalty/streaming company with a portfolio of 8 producing assets and 22 total assets. Last year, the company announced an impressive $225MM worth of transactions, making it one of the busiest companies sector-wide within its junior royalty peer group. This flurry of transactions included two major and transformative deals, with a stream on the Platreef and Greenstone projects, two mines that will be among the largest globally.
Notably, the company also completed a deal to add copper exposure to its portfolio, adding a meaningful royalty on the Caserones Project in Chile. It's important to point out that multiple assets in NSR's portfolio now have mine lives of 15 years or longer based on reserves, giving high visibility into future production, which should translate to a premium multiple for the company. However, as shown below, Nomad trades at a massive discount to its peer group.
(Source: Company Presentation)
Given Nomad's industry-leading organic growth profile, attractive dividend yield (2.5%), and experienced management team that's done it before, I see the stock as a Strong Buy on this pullback. Assuming the company executes, I would not be surprised to see the stock double over the next three years to a value of more than $13.50 per share, making it one of the most undervalued royalty/streaming companies sector-wide.
With the gold sector the most hated it's been in years, it's understandable that some investors have thrown in the towel, but the best time to buy is when the majority have completely given up. This is because the sector tops on euphoria and bottoms on despair, and it's hard to find a period where the sector has been more hated going back over the past years. With Nomad, Agnico, and SSR Mining all being high-quality producers at attractive valuations, I see these companies as 3 of the most attractive ways to play the sector.
Disclosure: I am long GLD, AEM, NSR
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying precious metals stocks, individual position sizes should be limited to 6% or less of one's portfolio.
GDX shares were trading at $31.77 per share on Friday afternoon, up $1.08 (+3.52%). Year-to-date, GDX has declined -0.81%, versus a -5.73% rise in the benchmark S&P 500 index during the same period.
About the Author: Taylor Dart
Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles.
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