4 Gold Stocks to Watch Amid Industry Challenges

·10-min read

Gold prices had started 2023 on a solid note but soon lost steam as strong U.S. economic data led to a rebound in the dollar and bond yields. Even though the yellow metal seems to have regained ground on the prospect of less severe interest rate hikes in the coming months, it remains to be seen whether this will sustain. This volatility clouds the near-term outlook for the Zacks Mining - Gold industry.

Amid this uncertainty, Barrick Gold GOLD, Royal Gold RGLD, AngloGold Ashanti AU and Yamana Gold AUY are well-poised for growth, backed by their strong balance sheets, efforts to lower costs and growth initiatives.

About the Industry

The Zacks Mining - Gold industry mainly comprises companies engaged in extracting gold from mines. The mines may be either underground or open pits. Mining is a long and complex process and requires significant financial resources. It involves exploration to evaluate the deposit's size, then assessing ways to extract and process the ore efficiently, safely and responsibly, and develop the mine before the actual mining process. It normally takes 10-20 years for a gold mine to produce material that can finally be refined. The players in the industry nowadays use a range of sophisticated techniques to extract gold and convert it into dore bars, an alloy of gold and silver, alongside other impurities. These are then sent for purification, after which gold is purchased as bars or coins or used in jewelry or other purposes.

What's Shaping the Future of the Mining-Gold Industry

Gold Prices Remain Volatile: The yellow metal had a lackluster 2022, having lost 0.3% of its value through the year.  This was mainly due to a strong U.S dollar and the aggressive interest rate hikes by the U.S Fed. Prices had somewhat regained ground in December 2022, supported by the opening of China’s economy and a less hawkish tone by the Fed’s Jerome Powell. The momentum continued through January 2023, with the yellow metal crossing attaining a high of $1,959 an ounce — the highest level since April 2022 on the back of a weaker U.S dollar. However, gold prices lost steam in February, as strong U.S. economic data propelled yields and the U.S. dollar higher. Gold prices have recently recouped some of the loss and are currently at around $1,897 per ounce. This was triggered by the fall in the value of the U.S. dollar after the sudden collapse of Silicon Valley Bank. Gold is gaining on speculation that the banking crisis will lead the Federal Reserve to take a less aggressive approach to policy tightening. Investors are also on the lookout for the upcoming U.S. inflation data before the Fed decides on monetary policy. Aided by this uptick, gold prices have notched a gain of 3% so far this year. Overall, this volatility in gold prices remains a concern.

Labor Issues, High Costs Persist: The industry continues to face a shortage of skilled workforce, causing a spike in wages. The industry players are persistently grappling with escalating production costs, including electricity, water and materials and supply-chain issues. Since the industry cannot control gold prices, it focuses on improving sales volume and operating cash flow and lowering unit net cash costs. The industry participants are opting for alternate energy sources, such as solar or wind farms, to minimize fuel-price volatility and secure supply. Miners are committed to cost-reduction strategies and digital innovation to drive operating efficiencies.

India and China to Support Demand: India and China together account for around 50% of consumer gold demand. A pick-up in demand in China is expected this year, aided by fewer COVID disruptions, a cautious economic rebound and a gradual pick-up in consumer confidence. Retail demand in India is expected to improve on improved consumer confidence and pent-up demand. The demand for physical gold is seasonally higher in the later part of the year, aided by the festival and wedding season in India.

Impending Demand and Supply Imbalance to Support Prices: Depleting resources, declining supply in old mines and lack of new mines remain inherent threats to the industry. Due to the scarcity of discoveries and exhaustive existing resources, miners prefer building up reserves through acquisitions rather than digging new ones that are inherently risky and capital-intensive. On the demand side, the use of gold in energy, healthcare and technology is rising. The yellow metal has long been considered a safe-haven investment in financial or political uncertainty. So, there will be an eventual demand-supply imbalance that is likely to drive gold prices. This bodes well for the industry in the long haul.

Zacks Industry Rank Indicates Dull Prospects

The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. The Zacks Mining - Gold Industry, which is a 69-stock group within the broader Zacks Basic Materials sector, currently carries a Zacks Industry Rank #150, which places it at the bottom 40% of 251 Zacks industries.

Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Versus S&P 500 & Sector

The Mining-Gold Industry has outperformed the S&P 500 Index, as well as the Basic Material sector, in a year. The stocks in the industry have collectively gained 11% compared with the broader sector’s gain of 8.1% and the S&P 500’s decline of 2.5%.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month EV/EBITDA, a commonly used multiple for valuing gold-mining companies, we see that the industry is currently trading at 7.73X compared with the S&P 500’s 19.71X and the Basic Material sector’s forward 12-month EV/EBITDA of 6.90X. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Over the last five years, the industry has traded as high as 9.55X and as low as 5.30X, with the median being 6.81X.

4 Mining-Gold Stocks to Keep an Eye On

Yamana Gold: The company recently reported that it produced 1,005,770 gold equivalent ounces (“GEO”s) in 2022, exceeding the guidance of 1,000,000 GEOs. Jacobina had a record year with a production of 195,427 ounces. Production increased for the ninth consecutive year at Jacobina and is expected to continue in the coming years as a result of the phased expansion strategy and the exploration programs in place. By prudently investing in its exploration project pipeline, the company has been steadily increasing its mineral resource base and generating consistent long-term growth in production and cash flow. It has significantly improved its balance sheet and financial flexibility and reduced debt levels. Its efforts to lower operating costs are expected to boost margins. In January 2023, the company announced that its shareholders voted in favor of its previously-announced acquisition by Pan American Silver. The transaction is expected to be completed in the first quarter of 2023, subject to the receipt of approval from the Mexican Federal Economic Competition Commission and satisfaction or waiver of certain other closing conditions. The company’s shares have gained 17% over the past six months.

The Zacks Consensus Estimate for the Toronto, Canada-based company’s 2023 earnings has moved up 20% over the past 60 days. AUY has a long-term earnings estimate growth rate of 4%. It has a trailing four-quarter earnings surprise of 1.3%, on average. AUY company currently carries a Zacks Rank #2 (Buy).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Price & Consensus: AUY

Barrick Gold: Its strong liquidity position and healthy cash flow position it well to take advantage of attractive development, exploration and acquisition opportunities. The company’s growth projects — Turquoise Ridge third shaft, Goldrush and the Pueblo Viejo plant and tailings expansion are currently in execution. These projects are advancing per the schedule and within budget, which underpins the next generation of profitable production from the core region. Also, the combination of Turquoise Ridge and Twin Creeks delivers a tier-one asset with another in the making at Goldrush.  The company’s shares have gained 2% in the past six months.

The Zacks Consensus Estimate for earnings for this Toronto, Canada-based company’s fiscal 2023 indicates year-over-year growth of 18.7%. The estimate has moved up 6% over the past 60 days. Barrick Gold has a trailing four-quarter earnings surprise of 11%, on average. It currently has a Zacks Rank #3 (Hold) and a long-term estimated earnings growth rate of 2%.

Price & Consensus: GOLD

Royal Gold: The company's strong balance sheet, focus on reducing debt levels and healthy cash position enable it to invest in properties with exploration and production upside. Focus on acquiring new streams will continue to aid growth. The addition of the high-quality long-life Khoemacau development project will drive growth. The company remains focused on allocating its strong cash flow to dividends, debt reduction and new business. The company projects stream segment sales of 54,000-59,000 GEOs for the March-end quarter of 2023. Recently Centerra, the operator of Mount Milligan, released the life of mine plan, which indicates an additional four years of mine life through 2033 and the potential to extend this life further. Centerra anticipates that the total payable gold and copper at Mount Milligan mine will increase by more than 800,000 ounces and 191 million pounds, respectively, from 2022 levels. Average yearly production is projected at 175,000 ounces of gold and 68 million pounds of copper. This bodes well for RGLD. Its shares have risen 21% over the past six months.

The Zacks Consensus Estimate for Royal Gold’s fiscal 2023 earnings indicates year-over-year growth of 10%. The estimate has moved up 2% over the past 60 days. RGLD has a trailing four-quarter earnings surprise of 4.1%, on average. The company currently has a Zacks Rank #3 and a long-term estimated earnings growth of 10%.

Price & Consensus: RGLD

AngloGold Ashanti: The company delivered on its key strategic objectives during 2022, achieving improvements in production and cash flow. AU reported gold production of 2.742 million ounces in 2022, up 11% year over year and meeting the company’s guidance. Results were aided by solid performances across most of the portfolio, with the Obuasi gold mine in Ghana meeting the targeted production of 250,000 ounces. Obuasi continues on the ramp-up to its full production run rate in excess of 400,000 ounces, which is expected to be achieved by the end of 2024. The company continues to mitigate the impacts of inflation on its costs through the continued integration of its new operating model (which is aimed at improving operating efficiencies), the operational excellence program already in place, and the Full Asset Potential ("FP") program. The FP program aims to achieve a step-change in AngloGold Ashanti’s competitiveness by 2024 and includes a three-month assessment that covers all aspects of the company’s mine sites. The company's shares have gained 31% in the past six months.

The Zacks Consensus Estimate for earnings for fiscal 2023 has been revised upward by 3% over the past 60 days. The consensus mark indicates year-over-year growth of 22.5%. The company has a long-term estimated earnings growth of 2.4%. AU currently carries a Zacks Rank #3.

Price & Consensus: AU

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Barrick Gold Corporation (GOLD) : Free Stock Analysis Report

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Royal Gold, Inc. (RGLD) : Free Stock Analysis Report

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