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4 Gold Stocks to Watch as Gold Loses Sheen on Vaccine Rollout

The Zacks Mining - Gold industry had been gaining on the back of the gold price rally fueled by COVID-19 pandemic induced safe-haven demand. However, progress on rollout of vaccines could rein in gold prices. Nevertheless, looming prospects of a dwindling supply and higher demand will eventually drive prices north, which bode well for gold-miners.

Amid the uncertainly, companies like Agnico Eagle Mines Limited (AEM), B2Gold Inc. (BTG), Yamana Gold Inc. (AUY) and Seabridge Gold, Inc. (SA) are poised well backed by their strong balance sheets and efforts to lower costs.

About the Industry

The Zacks Mining - Gold industry primarily comprises big and small companies that are engaged in gold extraction from mines of widely varying types and scale. Notably, gold mining is a long and complex process. Significant exploration and development to evaluate the size of the deposit followed by assessment of ways to extract and process the ore efficiently, safely and responsibly precedes actual mining. On average, it takes between 10-20 years for a gold mine to produce material that can be refined.

The mining, processing, development and mineral exploration activities are subject to several laws governing prospecting, development, production, taxes, labor standards and environmental regulation in various jurisdictions in which these companies operate.

What’s Shaping the Future of Mining-Gold industry

Vaccines to Put a Brake on Gold’s Stellar Run: In March 2020, gold had plunged to seven-year lows of $1,477 an ounce due to the COVID-19 crisis. However, the yellow metal soon bounced back on the back of low interest rates and unprecedented economic stimulus. Through the year, pandemic induced apprehensions regarding the global economic growth fueled safe haven demand for the metal.  Further, fears of supply crunch with miners halting their operations as per government mandates to curb the virus spread contributed to the price movement. Gold even shot past the $2,000 an ounce threshold for the first time in August 2020. However, the prospects of vaccine rollouts have impacted gold prices lately. The shift in risk sentiment has also pulled investors away from gold-backed ETFs. It is worth mentioning that although miners have resumed operations, the new coronavirus strain and renewed lockdowns might put a brake on mining operations again.

Cost Control & Innovation to Increase Efficiency: Mining companies are major consumers of energy with around 50% of their production costs closely linked to energy prices. Meanwhile, the industry has been facing a shortage of skilled workforce that has led to a spike in wages. Moreover, labor-related disputes can be damaging to production and revenues. Since the industry cannot control gold prices, it focuses on improving sales volume, operating cash flow and lowering unit net cash costs. The industry participants are also opting for alternate energy sources in order to minimize fuel-price volatility and secure supply. Miners are now committed to cost-reduction strategies and digital innovation to drive operating efficiencies.

India & China to Remain Major Consumers: Going forward, major markets namely, India and China (that roughly account for around 50% of consumer gold demand), will sustain demand for the yellow metal. The expanding middle class in China and India, and broader economic growth will have a significant impact on gold demand. Use of gold across energy, healthcare and technology is also on the rise. Moreover, the yellow metal has long been considered as a safe haven investment in times of financial or political uncertainty. Emerging market central banks are turning their attention to gold after years of exposure to the U.S. dollar, and as a natural currency hedge against other reserve currencies.

Impending Demand and Supply Imbalance: The industry players are currently dealing with depleting resources, declining supply in old mines and lack of new mines. Development projects are inherently risky and capital intensive. So, there will be an eventual demand-supply imbalance that is likely to drive gold prices, which bodes well for the industry over the long haul. Also, owing to scarcity of new discoveries and depleting existing resources, miners are preferring to build up reserves through acquisitions rather than digging for new ones that are inherently risky and capital intensive.

Zacks Industry Rank Indicates Dismal Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates drab prospects in the near term. The Zacks Mining- Gold Industry, which is a 34-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #229, which places it at the bottom 10% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Despite the bleak near-term prospects, we will present a few Mining – Gold stocks that one can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Versus Broader Market

The Mining- Gold Industry has outperformed the S&P 500 Index but underperformed the Basic Material sector in a year’s time. While the stocks in the industry have collectively advanced 20.5%, the S&P 500 has gained 17.8%. Meanwhile, the sector has gone up 20.6%.

One-Year Price Performance


 

Industry’s Current Valuation

On the basis of forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing gold-mining companies, we see that the industry is currently trading at 5.5X compared with the S&P 500’s 15.20X and the Basic Material sector’s forward 12-month EV/EBITDA of 5.26X. 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 9.92X and as low as 4.97X, with median being at 6.87X.

4 Mining-Gold Stocks to Keep an Eye On

Seabridge Gold: Based in Toronto, Canada, the company engages in acquisition and exploration of gold properties located in North America. It strives to provide shareholders with exceptional leverage to a rising gold price. The company is advancing on its major gold projects, KSM and Courageous Lake. It also intends to further explore the Iskut, Snowstorm and 3 Aces projects for selling or entering into joint venture arrangements with major mining companies. Notably, KSM is the world’s largest undeveloped project by gold resources. The recent acquisition of Snowfield is expected to increase KSM’s existing reserves and enhance project economics. The company’s debt free balance sheet also provides it a competitive edge.

The company’s shares have appreciated 55.2% in the past years. It 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: SA




Agnico Eagle Mines Limited: Headquartered in Toronto, Canada, the company is engaged in exploration, development, and production of mineral properties in Canada, Mexico, and Finland. The company maintains a solid exploration budget and is reinvesting in assets to expand output. It is expected to gain from the Kittila mine in Finland — the largest primary gold producer in Europe. The Kittila expansion is expected to enhance mine efficiency and lower current operating costs. LaRonde and Nunavut will also be major growth drivers. Agnico Eagle has access to Canadian Malartic — the largest producing gold mine in Canada — which is a significant contributor to its quarterly production. Moreover, it is committed to boosting shareholder's return, while maintaining healthy cash flows and lowering debt levels.

It has a long-term estimated earnings growth rate of 1%. The Zacks Consensus Estimate for earnings for fiscal 2021 has been revised upward by 21% over the past 90 days. The company has a trailing four-quarter earnings surprise of 13.5%, on average. Shares of the company, which carries a Zacks Rank #3 (Hold), have gained 15.6% over the past year.

Price & Consensus: AEM




B2Gold: Headquartered in Vancouver, Canada, B2Gold operates as a gold producer with three operating mines in Mali, the Philippines, and Namibia. The company plans to continue maximizing cash flows and maintaining strong financial position backed by higher gold production, gold prices forecast and lower unit operating costs. The company aims to achieve this by impressive operational and financial performance from its existing mines, expanding the Fekola Mine throughput and annual gold production. It also intends to pursue additional internal growth through exploration, development and expansion of existing projects. Further, the company continues to cut down debt.

It has a long-term estimated earnings growth rate of 20.7%. The Zacks Consensus Estimate for the company’s fiscal 2021 have moved up 6% over the past 90 days. Shares of the company, which carries a Zacks Rank #3, have appreciated 40% in the past year.

Price & Consensus: BTG




Yamana Gold: This Toronto, Canada based precious metals producer has significant gold and silver production, development stage properties, exploration properties, and land positions throughout the Americas, including Canada, Brazil, Chile, and Argentina. The company plans to continue to build on this base through expansion and optimization initiatives at existing operating mines, development of new mines, advancement of its exploration properties, and looking for other consolidation opportunities with a primary focus in the Americas. By prudently investing in its exploration project pipeline, the company expects to steadily increase its mineral resource base and generate consistent long-term growth in production and cash flow. The company has significantly improved its balance sheet and financial flexibility, and lowered debt levels.

The Zacks Consensus Estimate for the company’s 2021 earnings has moved north by 6% over the past 90 days. The company has a trailing four-quarter earnings surprise of 50%, on average. The company has a long-term estimated earnings growth rate of 21%. Shares of the company, which carries a Zacks Rank #3, have gained 48% over the past year.

Price & Consensus: AUY


 

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Seabridge Gold, Inc. (SA): Free Stock Analysis Report
 
B2Gold Corp (BTG): Free Stock Analysis Report
 
Yamana Gold Inc. (AUY): Free Stock Analysis Report
 
Agnico Eagle Mines Limited (AEM): Free Stock Analysis Report
 
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