After all of the recent M&A activity, we wanted to take a closer look at the senior gold producers to understand which companies are positioned to outperform over the long term.
If you’re an investor who believes in the long-term strength of gold, then miners are where you will realize maximum return on investment. Miners offer a far greater financial and operational leverage as well as the opportunity to receive dividends.
While gold is a safe haven for capital at a time when currency devaluation is a concern, miners will be where the money is made.
If you’re interested in looking at intermediate gold miners or junior gold miners, make sure you check out our other feature reviews.
Senior Gold Miners
Among the seniors, we’ve identified the 5 miners that we believe deserve consideration as a top gold investment:
- Agnico-Eagle
- AngloGold
- Barrick Gold
- Kinross Gold
- Newmont Goldcorp
We compared each of these companies by the following criteria:
- Share price performance
- Price to Net Asset Value
- Reserves and Resources
- Reserve Lifetime
- Price to Cash Flow
- Enterprise Value to EBITDA
- Dividend Yield
- All-in Sustaining Cost of Mining per oz
- Debt to Capital
We’ve summarized the analysis in terms of attractiveness in the following scorecard. You can read our full breakdown below.
Group Analysis
The following series of charts illustrate how the key metrics of these companies stack up against their peers. This is followed by a high-level overview of each company.
To set the stage we reviewed the implied upside from the current stock price based on consensus analyst target prices — this provides context around the potential upside relative to the senior gold peer group average.
Implied Upside to Consensus Target Price
Second, we looked at the relative performance of companies by quarter and year to date. Identifying companies that have lagged their peer group provides us with a reasonable screen for companies that may not have realized the benefits of gold’s recent strength. At a minimum, you want to be wary of companies whose stock has already run.
QTD and YTD Stock Price Performance
Next, we looked at the price to net asset value to determine how a company is trading relative to its total reserves and resources. This is a fundamental metric to determine what you’re buying over a longer time horizon.
Price to Net-Asset-Value
Along these same lines, the total reserves and resources are also important to look at. Senior miners with lower reserves and resources may need to look to accretive acquisitions to secure the growth that investors expect.
Reserve and Resources
We also looked at 2019 production estimates as well as a rough estimate on reserve lifetimes based on those production rates. While this lifetime calculation is far from exact, it does put the size of reserves and annual production into context.
Again, companies with a substantially lower lifetime than peers may need to look beyond organic growth that satisfies investors.
2019 Production Estimates and Reserve Lifetime
Looking at the more traditional metrics of price to cash flow (P/CF) and EV/EBITDA and dividend yield, these values provide an illustration of the companies’ current operations.
As with any sector, cash is king, so buying cash flow at a discount is always preferred. Similarly, EV/EBITDA provides a solid lens from which to assess the profitability of a company’s operations relative to price — no one wants to pay a premium for unprofitable operations.
2019 Price to Cash Flow Estimates
2019 EV/EBITDA Estimates
Dividend Yield
Finally, we reviewed key operational and balance sheet metrics to assess companies’ operational leverage and health of their balance sheet. The lower the AISC, the more free cash flow a company can generate per ounce of gold. The ratio of debt to capital gives investors a clear picture of a company’s financial leverage.
2019 AISC Estimates
Debt to Capital
Agnico-Eagle (AEM)
On a quarter-to-date basis, Agnico-Eagle has outperformed its peers modestly, while it is near average on the year. It is in line with peers relative to the upside from consensus estimates. This suggests Agnico-Eagle has realized the benefits of a strong gold price throughout 2019 and is performing according to market expectations.
AEM’s strengths lie in its low cost of production, which adds up quickly at the higher production output of senior miners.
The company is also sitting with a healthy balance sheet and pays investors an above-average dividend yield, which could be part of the reason it trades at a premium (40% increase over the last quarter).
Looking at traditional valuation metrics of price to cash flow, EBITDA, and NAV, Agnico-Eagle is priced at a premium compared to senior peers. It appears the company is priced on future growth as they are now turning the corner on Capex spend ($397 million) on two new mines in Nunavut.
The most recent third-quarter represented a return to positive free cash flow generation and record payable gold production. We expect the valuation metrics to return to industry average as free cash flow and EBITDA increase with the mine ramps.
Where things get more interesting is looking at the very low reserves, resources and general lifetime. Agnico-Eagle has one of the lower reserves and resources of the senior miners, and the lowest of the 5 we’ve highlighted.
The company also has low annual production (<2,000 Koz), and even with two new mines beginning commercial production, 2020 guidance still tops out at 2 million ounces. This lower production gives the company a modest reserve lifetime.
Given that investors demand revenue growth and at minimum a replacement of reserves and resources, this puts Agnico-Eagle in an intriguing position.
While they are undergoing drilling campaigns at many different sites, it’s unlikely they will see the doubling or tripling of reserves and resources required to bring themselves in line with other senior miners.
This suggests Agnico-Eagle may look at the acquisition of an intermediate producer to provide the growth investors seek. The company has a healthy balance sheet, growing free cash flow, and the challenges of new mine developments are behind them.
While they are expensive relative to current valuation metrics, there could be some interesting catalysts on the horizon. At a minimum, they are a reliable, low-cost producer about to enter a solid cash flow generation phase.
AngloGold (ANG)
At first glance, AngloGold appears to be an undervalued senior producer. The company has substantial upside according to consensus estimates and quarter-to-date they have been lagging peers.
The company is also trading at a discount to peers on P/NAV, P/CF, and EV/EBITDA. Further, they have substantial resources, which suggests there are solid opportunities for organic production growth.
Other metrics such as year-to-date performance, reserves, reserve lifetime and production are all average. Considering the potential with the large resources, low reserves aren’t necessarily a concern.
However, when you look closer at some key metrics, you see some red flags.
To start, the company has operations in areas with higher geopolitical risks. Case in point is the challenge they are having repatriating cash from the Democratic Republic of Congo.
These risk-factors will always weigh on a company’s stock price, which means they need above-average performance to justify a serious investment. Unfortunately, that isn’t the case for ANG.
The company appears to be struggling with costs, which exceeded $1,000/oz (AISC) this past quarter. This is partially due to lower production year-over-year, from a planned reduction in outputs, lower grades, and operational challenges. Given they were already above peer average, this is not the direction investors are looking for.
Further, the company is currently undertaking efforts to divest all assets in South Africa as well as mines in Mali and Argentina.
Management has committed to a strategic focus of “improving cash flows from a simpler, higher quality portfolio”, which suggests they recognize the company isn’t in an ideal situation.
While the company has been working to pay down its higher than average debt, it will likely see this fall further from the sale of assets. However, it’s unclear how much this will be reduced.
Ultimately, we believe analysts are overestimating the return on investment for AngloGold. With the divestment of assets, production and, therefore, cash flow and EBITDA, will drop, likely eliminating the stock’s current discount.
While it sounds like management is making the prudent decision of streamlining operations, at this time it’s unclear how long that process will take and when investors can expect to see the benefits.
Barrick Gold (GOLD, ABX)
There is a lot to like about Barrick Gold.
The company is currently underperforming peers on both a year-to-date and quarter-to-date basis. They have excellent reserves and resources compared to peers and the second-highest annual gold production in the world. Pair this with low AISC and you see the potential in Barrick Gold.
They also have a low debt to capital compared to peers. This should decrease further with the planned divestment of nearly $1.5 billion in non-core assets by the end of next year.
Looking at detractors, the company has an average upside from analyst estimates along with an average dividend yield (which was just increased this past quarter).
On a valuation basis, Barrick trades at slightly above average P/NAV, P/CF, and EV/EBITDA. Given investors are paying for some of the top operational leverage in the industry, these slight premiums seem more than reasonable.
Looking beyond the numbers, Barrick Gold’s management team has a proven track record of excellence in operation. The company has been focused on creating low-cost, high-quality, stable operations and clearly they are succeeding.
Drilling results continue to show organic growth potential with opportunities to extend the life of mine plans for multiple assets. Further, their Nevada JV just completed a very successful first quarter in operation.
With Barrick releasing new 5 year plans for each operating region followed by a 10-year total production plan, there are potential catalysts on the horizon. We believe Barrick Gold is one of the best long-term investments to capitalize on gold’s strength over the coming years.
Kinross Gold (KGC, K)
Kinross Gold has underperformed peers on both a year-to-date and quarter-to-date basis. The company also trades at a modest discount to peers on the basis of P/NAV, P/CF, and EV/EBITDA.
According to analyst estimates, there is a substantial upside in the stock from here. This may be derived from their improving operations and new/developing projects.
The company’s three largest producing mines achieved the lowest costs across its portfolio. This is an excellent sign for the future and should help lower their total AIS, which is high relative to peers.
Further, Kinross has multiple projects in development as well as multiple projects starting initial operations. This should help bolster annual production, which is on the lower end compared to peers.
Kinross’ balance sheet is healthy, with debt in control and operating cash flow increasing. At this time the company has no dividend, nor have they stated plans to introduce one.
They also recently announced a series of sales that should bring in $225 million in cash, along with a $300 million debt financing for improvements at their Tasiast mine.
Operationally the company is in a solid position. The largest question remains the size of its reserves and resources. On a 2019 basis, they have less than 10 years in reserves remaining, while their resources certainly do not support substantial organic growth in their current form.
This suggests the company might be looking for accretive M&A opportunities to grow assets beyond current levels. Given the developments at multiple projects, it’s unclear whether they will look for projects and land packages or an operating miner.
Overall Kinross appears to be on solid operational footing with increasing production and decreasing costs. However, based on their relative underperformance, it’s clear investors are expecting a greater return for their investment.
In order to see Kinross’s stock price appreciate, we believe its new mines (projects) will need to start generating free cash flow or another catalyst will need to present itself.
Newmont Goldcorp (NEM, NGT)
Newmont Goldcorp is the world’s largest gold miner by production. With industry-leading reserves and resources on top of that, the company is in a strong long-term position.
With that said, the stock has a below-average return by analyst estimates and has severely underperformed peers on a year-to-date basis and is lagging on a quarter-to-date basis as well.
Financially the company is in a solid position. They pay the highest dividend yield in our group, and have a healthy debt-to-capital ratio. They also recently announced they have authorized the repurchase of up to $1 billion in stock, which may help boost its price and justify the current strength over the last few weeks.
On a valuation basis, the company trades near group average, or slightly above. Given the scale and low degree of risk with their operations, a slight premium is expected.
The biggest detractor for Newmont is their relatively high AISC. They are well above group average by approximately $55/oz, which at their scale represents a value of over $300 million.
Based on 2020 guidance, they expect production to increase modestly, however, costs will likely stay near the same levels if not slightly higher. The company isn’t projecting decreases in AISC until 2021 and 2022.
Given the opportunity cost associated with waiting multiple years for improved efficiencies, investors choosing Newmont are relying on a modest production increase and share buybacks to realize increased value in their investment. As such, we don’t see Newmont as a better investment than a peer like Barrick Gold.
