Gold Miners Trading At Their Largest Discount

Amidst a backdrop of elevated inflation, near-record high gold prices, and negative real rates, many gold bulls are puzzled by the lack of upside follow-through in the Gold Miners Index (GDX). This is because, despite this favorable environment, the index is down 6% year-to-date and 40% from its Q3 2020 highs.

However, it’s important to note that the gold producers are up against significant headwinds which have dented margins, including higher labor, fuel, and materials costs. So, while they have historically performed well in this environment, some of the gold price’s upside has been offset by these rising costs.

Given that the GDX is littered with several high-cost producers with sub-par track records, this has weighed on the index’s performance, dragging down nearly all the stocks in the sector and the GDX.

The good news is that this 22-month decline (August 2020 – June 2022) has left some of the highest-quality miners sitting at their cheapest valuations since Q1 2020.

In this update, we’ll look at three miners that are not only less affected by the inflationary pressures but are trading at a significant discount to their historical multiples: Kinross Gold (KGC), Alamos Gold (AGI), and Wesdome Mines (WDOFF).

Kinross Gold (KGC)

Beginning with Kinross, the company is a 2.0-million-ounce producer with operations in Mauritania,
Brazil, Nevada, Alaska, and Chile.

The company has been performed the worst among its larger peers over the past year, punished by the acquisition of a development-stage project in Canada and after divesting its Russian assets this spring after the invasion of Ukraine.

While the latter development wiped out more than $1.0 billion in net asset value and 300,000 ounces of annual gold production, the company may be better positioned following the divestment, even if the assets were sold for less than fair value. This is because Kinross was not getting much value for its Russian assets (Kupol, Udinsk) anyways and can now command a higher multiple with an Americas-focused portfolio.

Understandably, investors are disgusted with the stock’s performance, with it down over 60% since Q3 2020. However, at current prices, the correction looks to be overdone.

This is because Kinross has historically traded at 7x cash flow and is currently trading at 3.5x FY2023 cash flow estimates ($1.20 per share). While I think 7x cash flow is a high estimate and 5.5x cash flow is more appropriate, this still translates to a fair value of $6.60 per share, or more than 65% upside from current levels.

It’s also important to note that FY2023 cash flow does not factor in any upside from its Dixie Project that it recently acquired in Canada, which looks to be home to 9+ million ounces of gold and could produce 425,000+ ounces per annum at sub $800/oz costs.

Kinross Historical Cash Flow Multiple

Source: Kinross Historical Cash Flow Multiple, FASTGraphs.com

With production not expected to begin until 2028 at Dixie, this asset has been discounted and Kinross doesn’t get much value for the asset. However, I see a fair value for this asset of $1.7 billion, translating to more than $1.50 per share in additional upside long-term.

While the stock’s 18-month fair value lies 65% higher, the stock has the potential to more than double long-term if it can execute successfully at Dixie. Given this deep discount to fair value combined with a 3.0%+ dividend yield, I see the stock as a steal at $4.00

Alamos Gold (AGI)

The second name worth watching closely is Alamos Gold, a mid-tier gold producer currently churning
out 450,000+ ounces per annum from its three operations in Canada and Mexico.

However, the stock has fallen out of favor recently, given that its costs have risen above $1,200/oz and are expected to come in at levels above the industry average in 2022.

While this certainly dampens the short-term margin outlook ($1,130/oz costs in 2021), Alamos will look like a completely different company by the second half of 2025. This is because it’s currently constructing its Phase 3 Expansion at its high-grade Island Gold Mine, which will push production from ~125,000 ounces per annum to 230,000+ ounces per annum.

Meanwhile, the company aims to construct a 4th mine in Manitoba (Lynn Lake), adding another
150,000 ounces per annum by 2026.

Alamos Gold Growth Plan

Source: Alamos Gold Growth Plan, Company Presentation

If Alamos was only a growth story, it would be unique, and we would already expect it to command a
premium multiple in a sector where growth is hard to find.

However, it’s important to note that this growth will be accompanied by significant margin expansion and a jurisdictional upgrade. This is because its Phase 3 Expansion which will nearly double throughput, is expected to contribute to sub $600/oz costs at Island.

At the same time, Lynn Lake’s costs should come in below $975/oz. The result will be a transformation from a 450,000-ounce producer at $600/oz margins ($1,800/oz gold price) to a ~750,000-ounce producer with $1,000/oz margins ($1,800/oz gold price.

Finally, it will see its exposure to Mexico (Tier-2 rated jurisdiction) dip from 30% to 20%. The result is a company that will enjoy expansion in its P/NAV multiple at the same time as its cash flow increases substantially.

Based on this outlook, I see a fair value for the stock above US$10.00 and view this pullback in AGI as a gift.

Wesdome Mines (WDOFF)

The final name becoming attractive is Wesdome Mines, a junior producer operating out of Canada with
one mine in Ontario and another in Quebec.

While junior producers are a dime a dozen, Wesdome is special given that it has two of the highest-grade gold mines globally, and it’s busy ramping up to full production at one of them (Kiena) over the next year.

Given its 10+ gram per tonne gold grades, it uses considerably less fuel and labor than its peers per ounce of gold produced, given that it’s moving less than one-sixth the rock volume given its grades.

Highest Grade Gold Mines Globally

Source: Highest Grade Gold Mines Globally, Company Filings, Author’s Chart

Wesdome’s steady ramp-up at Kiena means that while its costs may be above $1,100/oz currently,
they’re expected to slide to less than $825/oz by 2024.

Given this enviable position as a company with meaningful margin expansion on the horizon in a period of slight margin contraction sector-wide, I would view any pullbacks below US$8.00 (key technical support level) as buying opportunities.

Final Thoughts

With the gold miners trading at their largest discount to net asset value in two years, I see now as a favorable time to begin adding some exposure. Given KGC, AGI, and WDOFF’s improving margin profiles looking out to 2025, I believe they are three of the best ways to get exposure to the sector.

Disclosure: I am long AGI, KGC

Taylor Dart
INO.com Contributor

Disclaimer: This article is the opinion of the contributor themselves. 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 in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.

Three Gold Miners To Buy On Dips

It’s been a turbulent month for the markets, but while the S&P-500 (SPY) and Nasdaq Composite (QQQ) are deep in negative territory, the price of gold has been holding up well. This is evidenced by its (-) 1% monthly return and flat performance year-to-date.

This 2000 basis point out-performance for the yellow metal should not be overly surprising, given that it typically performs its best when real rates are deep in negative territory.

While this is good news for gold investors, it’s also good news for gold miners, one of the few industry groups holding the line on margins. Let’s take a closer look below:

Gold to S&P500 ratio

Source: TC2000.com

Gold Miners Index

One of the preferred ways to get exposure to the gold price is through the Gold Miners Index (GDX), the most popular ETF that holds a basket of 50 miners. The problem with the index is that at least 50% of gold miners are un-investable, and several are poorly run, so the high proportion of laggards dilutes the performance of the ETF.

For this reason, my favorite way to play the sector is to focus on individual names, particularly those with high margins and growth. Three companies that meet this criterion are Agnico Eagle (AEM), Orla Mining (ORLA), and Karora Resources (KRRGF).

Agnico Eagle

Beginning with Agnico Eagle, the company is a 3.4-million-ounce producer with 11 mines that operates out of Canada, Australia, Mexico, and Finland.

While producers of this size are typically not known for growth, Agnico has an enviable pipeline of non-operating assets it’s looking to bring online (Hope Bay, Santa Gertrudis, Upper Beaver). These projects combined could add 600,000 ounces of additional gold production by 2027.

Apart from this, Agnico has organic growth at multiple assets, including a new shaft at Macassa, the potential to integrate a nearby deposit, and plans for higher throughput at Detour. Combined with its non-operating pipeline, this could push annual production to 4.4 million ounces by 2028.

Agnico Eagle Growth, Company Filings

Source: Agnico Eagle Growth, Company Filings, Author's Chart & Estimates

This 30% production growth profile places Agnico in rare air among its peers, where most million-ounce producers struggle to maintain production levels as their highest-grade reserves are depleted.

Combined with industry-leading margins and 95% of production from Tier-1 jurisdictions, Agnico should command a premium multiple, easily justifying an earnings multiple of 24 and a P/NAV multiple. This translates to a fair value of ~$75.00 per share, making the stock a steal on this pullback below $52.00.

As a bonus, investors are getting a nearly 3.0% dividend yield at current prices.

Orla Mining

The second name worth keeping a close eye on is Orla Mining, a new producer with a ~100,000-ounce production profile in Mexico.

The company is a single-asset producer, which generally makes for a riskier investment, but it recently announced that it would be acquiring Gold Standard Ventures, a gold developer in Nevada. Not only does this diversify the company from complete reliance on Mexico for its operations, but it should also transform it into a dual-asset producer by 2025, with multi-asset producers typically commanding higher multiples due to their lower risk profile.

Gold Standard’s South Railroad Project [SRP] is similar to Orla’s current producing mine, Camino Rojo, with both being heap-leach operations, which Orla has experience with, having just built this mine on time and under budget last year.

Assuming Orla chooses to develop the SRP, the company could grow production to more than 300,000 ounces per annum by 2026 at costs below $850/oz. This could easily justify a market cap of $1.65BB, which, divided by ~330MM fully diluted shares, would translate to a fair value of $5.00 per share.

Based on a current share price of $3.45, and with the stock being in the unfavorable post-acquisition period when stocks often come under pressure, I don’t see this as a buying opportunity just yet.

However, if we were to see ORLA dip below $2.95 per share, this would present a low-risk buy point for a starter position in the stock with ~70% upside to fair value.

ORLA Mining Company Presentation

Source: Company Presentation

Karora Resources

The last name worth keeping an eye on is Karora Resources, a mid-tier producer operating in Western Australia that’s also focused on growth.

As outlined last year, the company plans to increase gold production to 200,000 ounces per annum by 2025, up from ~100,000 ounces in 2021. This is expected to be accomplished by adding a second decline at its flagship Beta Hunt Mine and doubling ore production from the mine.

However, after a recent acquisition of a new mill (Lakewood) just north of Beta Hunt, it’s looking like there’s the potential to increase annual gold production to 240,000 ounces by 2026 due to extra capacity (addition of a second mill to process material).

Karora Growth Plan

Source: Karora Growth Plan, Company Presentation

Following this upgraded outlook, Karora now has one of the most impressive growth profiles sector-wide, with a ~19% compound annual growth rate from 2022-to 2026 if it can meet these production goals.

This production growth is expected to be coupled with margin expansion as it boosts nickel production (higher by-product credits) and benefits from economies of scale. So, with the stock 40% off its highs below US$3.10 per share, I see the stock as a steal at current levels.

Final Thoughts

With the gold miners out of favor and trading at their cheapest valuations relative to the gold price in more than five years, I believe now is the time to begin scaling into the sector with long positions into weakness.

In my view, Agnico Eagle and Karora Resources are two of the most attractive ways to play this trend towards gold’s recent outperformance vs. equities. Elsewhere, if Orla sees more share-price weakness below $2.95, this will represent another growth name to complement a portfolio in an industry where it’s difficult to find growth historically.

Disclosure: I am long AEM, KRRGF, GLD

Taylor Dart
INO.com Contributor

Disclaimer: This article is the opinion of the contributor themselves. 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 in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.