Fundamentally strong precious metals stocks will benefit from higher prices in gold and silver
Gold stocks have been relatively subdued in the recent past. This has been in line with the performance of precious metals. Gold touched a closing high of $2,048 an ounce in August 2020. Currently, gold trades at $1,734 an ounce. Silver has also been in a correction mode after a big rally.
The correction in precious metals seems more like near-term profit booking than an end to the bull market. Therefore, it’s a good opportunity to consider exposure to gold stocks and silver stocks. It’s very likely that precious metals will make new all-time highs in the coming quarters.
Even as the global economic outlook improves, the Federal Reserve is likely to keep interest rates near-zero levels through fiscal year 2023. The Fed also believes that inflation will be settling back after a jump this year. However, inflation is dynamic and inflation targeting is a challenge. Further, with global expansionary policies, inflation can possibly remain at higher levels.
This is a key reason to be bullish on precious metals. Gold and silver have always been considered as a good hedge against inflation. And I will not be surprised if gold surges above $2,000 an ounce.
Another important point to note is that with excess global liquidity, funds have been swiftly flowing from one asset class to another. Bitcoin (CCC:BTC-USD) and other cryptocurrencies have surged higher. A correction in the cryptocurrency space might induce a rally for relatively undervalued asset classes. Gold does seem attractive from that perspective.
With this overview, let’s talk about four gold stocks and silver stocks that are worth accumulating.
- Newmont Corporation (NYSE:NEM)
- Kinross Gold (NYSE:KGC)
- Hecla Mining (NYSE:HL)
- Pan American Silver (NASDAQ:PAAS)
Silver and Gold Stocks: Newmont Corporation (NEM)
Among gold stocks, NEM stock is possibly the top name to consider. The stock has been sideways in the last six months and it seems that an upside is imminent. At a price-to-earnings ratio of 17.3, NEM stock looks attractive.
Newmont Mining has 94 million ounces of gold reserves and 101 million ounces of gold resources. Considering the production profile, the company has more than 10 years of gold reserve life. This positions Newmont for sustained value creation as gold trends higher.
By 2025, the company is targeting an all-in sustaining cost of $800 to $900 an ounce. Even if gold trades in the range of $2,000, a low AISC implies strong free cash flow potential.
Newmont reported free cash flow of $3.5 billion in 2020 and ended the year with a cash buffer of $5.5 billion. Further, the company’s net debt-adjusted EBITDA was 0.2. With a strong financial flexibility, inorganic growth is also a possibility.
Overall, NEM stock seems well positioned to trend higher and the current dividend yield of 3.6% looks attractive. The stock is a good proxy for holding physical gold and is worth considering for the long-term portfolio.
Kinross Gold (KGC)
I also like KGC stock among gold stocks. Newmont Mining offers investors with strong fundamentals and dividend growth visibility. On the other hand, Kinross Gold is likely to see gold production growth in the next few years. This factor makes KGC stock attractive at current levels.
For the current year, the company expects production of 2.4 million ounces of gold. Next year, the company expects production to increase to 2.7 million ounces. Further, in 2023 gold production is expected to increase to 2.9 million ounces.
Therefore, Kinross Gold stands to benefit from higher gold price coupled with production growth. This is likely to translate into significant acceleration in free cash flows. Last year, the company generated over $1 billion in FCF. It would not be surprising if FCF doubles in the next three to four years.
From a financial perspective, Kinross Gold has a liquidity buffer of $2.8 billion and an investment grade balance sheet. Therefore, the company is positioned to accelerate investments and boost the production profile.
Kinross Gold expects AISC to be $1,025 an ounce for the year. This would imply healthy EIBTDA margin even if gold trades around $1,800 to $2,000 an ounce.
Overall, with strong fundamentals and production growth visibility, KGC stock is worth considering. At a trailing-12-month P/E of 7, the stock looks very attractive for fresh exposure.
Silver and Gold Stocks: Hecla Mining (HL)
HL stock is another name that gives investors quality exposure to precious metals. I would rate HL stock as the top name among silver stocks. In the last year, the stock has surged by 183%. However, if gold and silver continue to trend higher, the stock has more upside potential.
Hecla Mining is the largest silver producer in the United States. The company owns two of the largest and highest-grade silver mines in the world. However, the company is also diversified into gold production.
In terms of reserves, the company ended 2020 with 188.4 million ounces of silver reserves and 2.4 million ounces of gold reserves. With a strong financial profile, the company is positioned to deliver steady production growth. Last year, the company reported a 7% growth in silver production as compared to 2019.
From a liquidity perspective, Hecla mining reported a total liquidity buffer of $380 million. Further, in 2020 the company’s FCF was $89.8 million. It’s very likely that FCF will be above $100 million this year.
Hecla is therefore positioned to increase dividends and invest in growth projects. The company also has an attractive AISC profile for gold and silver, which will ensure that EBITDA margin remains healthy.
HL stock is down about 8% so far in 2021. This is a good accumulation opportunity for investors who are bullish on precious metals.
Pan American Silver (PAAS)
Among silver stocks, PAAS stock is another attractive name to consider. In the last six months, the stock has remained sideways. However, business developments point to upside in the coming quarters.
Pan American is also diversified with 550 million ounces of silver reserves and 5.2 million ounces of gold reserves. For the current year, the company expects silver production of 23.3 million ounces. This would imply a 35% growth in production from last year.
Further, the company is expecting to deliver record gold production. Therefore, there are reasons to be bullish on the stock.
Last year, the company delivered $462 million in operating cash flow and $323 million in FCF. Given the production growth visibility, FCF is likely to be higher in the current year.
Another key point to note is that the company’s reserve replacement for silver and gold in 2020 was 76% and 107%, respectively. As the company’s cash buffer improves, there is scope for accelerating investments and increasing the reserve replacement ratio.
PAAS stock looks attractive after consolidation and a sharp move on the upside is likely in the coming quarters.
Note: This article originally appeared at InvestorPlace.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.