Gold Mining Stocks Poised for a Gold Rebound

With investors concerned about inflation and a bubbly equity market, a gold rebound could drive these gold mining stocks higher.


Gold bars

The last several months have been unquestionably hard ones for gold investors and gold mining stocks. After peaking at just under 2,100 an ounce last August, the yellow metal’s price has spent the last eight months in a dormant state while prices for virtually every other major financial asset have trended higher.

But after a long hibernation, there are signs that gold is about to emerge from its slumber and awaken to a meaningful refreshment phase. The onset of spring, moreover, has witnessed gold’s price bottom out.

At the same time, there are tell-tale signs of growth shoots emerging from the ground as several leading gold mining stocks display relative strength. Here we’ll discuss the intermediate-term gold outlook along with the prospects for three promising precious metal miners.

After dropping nearly 20% since peaking last summer, the gold futures price has found support above the 1,680 level and has lately shown signs of strengthening.

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Providing the fundamental backdrop for this technical improvement is a combination of factors which have historically been good news for the metal’s intermediate-term outlook. For starters, signs are increasing that inflation is on the rise in the U.S.

Consider the following graph from the St. Louis Fed, which shows the 5-year breakeven inflation rate. This indicator is based on a measure of expected inflation derived from 5-Year Treasury Constant Maturity Securities. It suggests what participants expect inflation to be in the next five years.

inflation chart

As you can see, this indicator is currently at its highest rate in 10 years and is up over 100% from a year ago. It’s an undeniable sign that the market expects more inflation down the road. (This is significant since inflation is generally supportive for gold prices, and the metal has long been used as a store of value to protect investors from inflation’s ravages.)

Another major factor that is providing support for gold and mining stocks is the latest increase in geopolitical and financial market apprehensions. The recent imposition of U.S. sanctions against Russia in retaliation for last year’s “SolarWinds” cyber-attacks is one reason behind the uptick in fear. Another one is the growing belief that the relentless rise in U.S. equity market prices are unsustainable and that stocks may be in a “bubble.”

Indeed, more than any single variable, gold performs best in a climate of worry. And it’s my contention that the “fear factor” is the number one driver of gold prices. This is why gold is known as the ultimate fear gauge since its price has historically done an excellent job of reflecting widespread fears among participants.

In view of these considerations, investors might consider having some exposure to gold by owning shares in some of the best-performing and biggest gold mining companies. Historically, the shares of companies that mine and explore for the metal tend to outperform the gold price itself. (Mining stocks may therefore be considered as a leveraged play on a precious metals bull market.)

Gold Mining Stock #1

Barrick Gold (GOLD), the world’s second-largest gold mining company, is well positioned to benefit from a gold rebound this year. The yellow metal’s improving fortunes allowed the company to deliver 125% per-share earnings in 2020, while revenue (up 28% for the year) has been trending higher since 2018.

 

gold-price-chart

Barrick forecasts all-in sustaining costs (a measure of how cheaply a firm can mine gold) at around 929 per ounce as of last year’s fourth quarter—well below current prices of around 1,750 per ounce—and giving the firm plenty of room to take on additional projects. Consequently, analysts are predicting even more top- and bottom-line growth in the first half of 2021.

The company is also disposing of non-core assets, rapidly paring its long-term debt and has announced a 10-year plan to become the world’s most valued bullion company. All told, Barrick has every reason to be optimistic about its future.

Gold Mining Stock #2

Coeur Mining (CDE), the world’s sixth-largest silver miner by revenue, explores, develops and operates silver and gold mining properties throughout North and South America.

Coeur is a cash-generating machine, and the company’s fortunes are being driven by the expansion of its Rochester silver-gold mine in Nevada, which managements said offers “significant reserve growth and the benefits of a larger-scale expansion project.”

A recent technical report revealed an 18-year reserve life for Rochester with annual production expected to exceed 8 million ounces of silver and 80,000 ounces of gold for the first 10 years after the expansion, with an average annual free cash flow of $104 million expected.

Management has also guided for higher production and “another great free cash flow year,” while analysts predict top- and bottom-line increases of 18% and 93%, respectively, for 2021. It’s a solid story driven by strength in multiple demand channels.

cde-price-chart

Gold Mining Stock #3

Freeport-McMoRan (FCX), which mines copper, gold and other commodities in four continents, is benefiting from some pretty significant tailwinds right now. One of those tailwinds is higher copper prices, which are up 85% since last April. This has provided Freeport with a higher average realized price for the red metal. But the company is also benefiting from gold, with sales 9% above the company’s guidance in Q4.

fcx-price-chart

Looking ahead, management projects a copper sales increase of 20% over 2020, with gold volumes expected to rise by more than 50%—even as production remain low. The company’s quarterly dividend has also just been reinstated, tying a nice bow on an otherwise attractive package.

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