The prospects for the Zacks

Mining – Gold

industry look bright at the moment on the back of improving gold prices. The yellow metal is likely to gain next year on improving demand, fears of a recession and geopolitical tensions.

With gold prices anticipated to gain further on demand-supply imbalance, companies like

Franco-Nevada Corporation


FNV

,

Agnico Eagle Mines


AEM

,

AngloGold Ashanti


AU

and

Galiano Gold Inc.


GAU

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, followed by assessing ways to extract and process the ore efficiently, safely and responsibly, and, finally, 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, following which gold is purchased in the forms of bars or coins or used in jewelry or for other purposes.

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

Gold Prices Regain Ground


: The yellow metal started this year on a strong note, hitting a high of $2,078.70 an ounce in the first week of March. However, it soon lost steam as the Fed announced its first rate hike since 2018 to tame the mounting inflation. Since then, for a major part of 2022, gold prices remained under pressure (even dropped to as low as $1,618 an ounce) due to monetary tightening by central banks around the world. Gold prices have, however, regained ground lately. It crossed the $1,700 an ounce mark in November as the Fed meeting that month signaled a likelihood of a slowdown of rate hikes. Gold rose 7% in November, breaking the seven-month decline stint. So far in December, gold has gained 2% and peaked at $1,836.90 an ounce on Dec 13, following the release of the lower-than-expected U.S. annual inflation figures. Gold has since steadied, closing at $1,787.80 an ounce on Dec 15, as the Fed offered a more hawkish outlook on its policy than markets anticipated. At its last meeting, the Fed delivered a smaller half percentage point rate hike but projected a terminal rate of 5.1% next year, higher than previously stated. While rate hikes pose challenges to gold, continued geopolitical risks and fears of recession will likely drive the demand for gold as a hedge.

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 next 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 times of 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 Bright Prospects

The group’s

Zacks Industry Rank

, basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. The Zacks Mining – Gold Industry, which is a 39-stock group within the broader Zacks

Basic Materials

sector, currently carries a Zacks Industry Rank #96, which places it at the top 39% of 248 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 Outperforms 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 5.6% compared with the S&P 500 and the broader sector’s decline of 2.0% and 15.1%, respectively.

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 6.86X compared with the S&P 500’s 10.57X and the Basic Material sector’s forward 12-month EV/EBITDA of 6.17X. 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 9.24X and as low as 4.63X, with the median being 6.30X.

4 Mining-Gold Stocks to Keep an Eye on

AngloGold Ashanti

: The company recently completed the acquisition of Coeur Mining’s (CDE) C-Horst, SNA, Secret Pass and Daisy ore bodies, as well as the decommissioned Sterling Mine in the Beatty district of southern Nevada. The addition of the properties consolidates AU’s ownership position in one of North America’s most promising new gold districts. Gold production for the third quarter of 2022 was up 20% year over year to 738,000 ounces, courtesy of solid performances across the portfolio, bringing the year-to-date total to 1.8 Moz (million ounces). This puts the company on track to meet its production guidance of 2.55-2.80Moz in 2022. The majority of production growth is expected to come from Obuasi, with improvements expected at other assets. 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 43% in the past three months.

The Zacks Consensus Estimate for the company’s, headquartered in Johannesburg, South Africa, 2022 earnings has moved up 13% over the past 60 days. AU has a long-term earnings estimate growth rate of 4%. The 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: AU

Galiano Gold

: The company reported gold production of 43,899 ounces in the third quarter of 2022. Higher production for the quarter was driven by improved metallurgical recoveries and stockpile material performing better than expected. The significant work undertaken in the second quarter of 2022 to optimize the Asanko Gold Mine’s plant performance assisted in the higher recoveries achieved during the period. Backed by the performance, GAU revised its gold production guidance upward to 160,000-170,000 ounces for 2022. Backed by these developments, the company’s shares have gained 10.4% in the past three months. GAU concluded the metallurgical test work program at Esaase, which provides greater clarity on the deposit’s metallurgical recoveries. These results, in conjunction with the strong exploration success achieved during the quarter, pave the way to reinstate Mineral Reserves for the Asanko Gold Mine, which will be provided in the upcoming Feasibility Study Technical Report.

Headquartered in Vancouver, Canada, Galiano Gold has an expected earnings growth of 133% for the current year. The Zacks Consensus Estimate for the company’s fiscal 2022 earnings has moved up 133% over the past 60 days. GAU currently carries a Zacks Rank #2.

Price & Consensus: GAU

Franco-Nevada Corporation

: FNV appears on a promising long-term trajectory, backed by a healthy portfolio of streaming and royalty agreements on several properties mined by some of the most reputable mining companies in the world. FNV is debt-free and uses its free cash flow to expand the portfolio and pay out dividends. Given its focus on cost management, FNV continues to generate high margins. Franco-Nevada has been enhancing its portfolio without adding significant overhead. The company will gain from mine expansions and the construction of new mines in the years to come. FNV’s shares have appreciated 14.2% in the past three months.

This Toronto, Canada-based gold-focused royalty and stream company has a long-term estimated earnings growth rate of 4%. The Zacks Consensus Estimate for earnings for fiscal 2022 indicates growth of 4.3% from the year-ago quarter’s reported figure. The consensus estimate has moved up 3.7% over the past 60 days. FNV has a trailing four-quarter earnings surprise of 1.3%, on average. The company currently carries a Zacks Rank #3 (Hold).

Price & Consensus: FNV

Agnico Eagle


Mines

: The company increased its exploration budget. It is reinvesting in its assets to expand output. Agnico Eagle Mines’s sufficient cash flow is enabling it to maintain a strong exploration budget, primarily focused on Kittila, Canadian Malartic, LaRonde, Kirkland Lake, Hope Bay and Santa Gertrudis. Notably, the company’s Kittila mine in Finland is the largest primary gold producer in Europe. It also hosts the company’s largest mineral reserve. With the expected completion of the shaft sinking expansion at Kittila in 2022, the annual gold production is expected to increase in 2022 and beyond. The company continues to expand the exploration drilling of Roura Main, Sisar and Rimpi Zones to make use of better grades. AEM has identified LaRonde, Canadian Malartic and Nunavut as the major drivers for cash flow generation over the next several years. AEM is expected to gain from the Hope Bay acquisition and the Hammond Reef project. It has access to Meliadine and Canadian Malartic, major contributors to its quarterly production. The company’s shares have gained 20.5% in the past three months.

The Zacks Consensus Estimate for the Toronto, Canada-based company’s 2022 earnings has moved up 3.2% over the past 60 days. AEM has a trailing four-quarter earnings surprise of 26.4%, on average. The company currently carries a Zacks Rank #3 and has a long-term estimated earnings growth of 1%.

Price & Consensus: AEM

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