Outlook for gold and silver prices
The massive injection of funds into the economy via debt creation to help households and businesses going through the Covid-19 crisis generates a debt quality problem, increasing the risk of default for several countries.
Suriname and Zambia have already gone bankrupt. Fears that other economies may follow suit enhance uncertainty in the financial markets, leading to elevated volatility against which high net worth individuals are reasonably in search of ways to protect the value of their assets. Gold and silver are two of the fewer classes available to the investing community that provide such a shield, as they also serve as safe-haven assets when needed.
Thus, gold and silver, whose prices per troy ounce gained 21.6% and 38.3% so far this year, are forecasted to trade higher over the next months, reversing the negative trend we have seen over the last week.
Gold futures traded at $1,889.10 per ounce, while silver futures were at $24.775 per ounce.
Gold and silver producers
In order to benefit from an expected rising precious metal, investors should consider increasing their holdings in publicly traded gold and silver mining companies as their prices usually rise more than the commodity itself.
If investors want to get exposure to gold and silver for a medium to long period of time, they should purchase shares of large producers as these financially sound businesses are less vulnerable to possible corrections in the prices of the precious metals should they suddenly change direction.
If the investment horizon is less than six weeks, investors should buy small mineral operators who are better positioned to take the best from a bull market, knowing that in this case the investment will also be subject to negative effects due to the high volatility of the gold and silver markets.
Large gold and silver producers
Barrick Gold Corp. (GOLD, Financial), Newmont Corp. (NEM, Financial), Kinross Gold Corp. (KGC, Financial), First Majestic Silver Corp. (AG, Financial) and Pan American Silver Corp. (PAAS, Financial) are well-known Canadian mining companies, and some of the world's largest producers.
Year to date, Barrick Gold is up 39.3%, Newmont is up 49.6% and Kinross Gold is up 67.51%, outperforming the VanEck Vectors Gold Miners exchange-traded fund (GDX, Financial), which has increased by 29.8%.
Pan American Silver increased by 39.4%, outperforming the Global X Silver Miners ETF (SIL, Financial), which increased by 32.8%. Regardless, shares of First Majestic have lost a bit of momentum over the past couple of weeks, for a year to date decline of 11.3%.
The tables below illustrate the most important metrics of these five stocks.
| Ticker | Company | Q3 2020 Gold, Silver Output | Q3 2020 AISC/oz. | Q3 2020 Average Realized Price per Ounce Sold | Q3 2020 Revenue | Q3 2020 Adjusted EPS | Full 2020 Guidance on Production | Full 2020 Guidance on AISC/oz. | Full 2020 Guidance on CAPEX |
| GOLD | Barrick Gold Corp | 1.155 million ounces of gold | $966 | $1,926 | $3.54 billion (up 32.1% year over year) beats by $100 million. | $0.41 beats by 9 cents | 4.6 million - 5 million (gold attributable to Barrick) | $920 to $970 | $1.6 billion to $1.9 billion |
| NEM | Newmont Corp | 1.5 million ounces of attributable gold | $1,020 | $1,913 | $3.17 billion (up 17% year over year) misses by $70 million. | $0.86 beats by 3 cents | 5.7 million - 6.3 million (gold attributable to Newmont) | $1,015 | $1.4 billion |
| KGC | Kinross Gold Corp | 603,312 ounces of gold equivalent | $958 | $1,908 | $1.13 billion (up 28.8% year over year) misses by $30 million. | $0.25 beats by 4 cents | 2.28 million - 2.52 million ounces of gold equivalent (attributable to Kinross) | $970 | $855,000 to $945,000 |
| AG | First Majestic Silver Corp | 5.2 million ounces of silver equivalent | $9.94 | $22.58 | $125.9 million (up 29.8% year over year) misses by $12.02 million. | $0.12 misses by one cent | approximately 11.25 million ounces of silver and 110,060 ounces of gold, to compose total annual ounces of silver equivalent forecasted at 23 million ounces | San Dimas (silver/gold mine): $7.09 - $8.22. Santa Elena (silver/gold mine): $8.33 - $9.43 La Encantada (silver mine): $12.59 - $13.07. For a Total of $12.29 to $13.45 as per company's presentiation | $132 million |
| PAAS | Pan American Silver Corp | 4.1 million ounces of silver and 116,900 ounces of gold | $6.01 per silver ounce sold and $1,057 per gold ounce sold for consolidated AISC of negative $8.42 per silver ounce sold. | $24.77 per ounce of silver sold and $1,914 per ounce of gold sold | $300.4 million (down 14.7% year over year) misses by $98.99 million. | $0.34 misses by 4 cents | 18 million - 19 million ounces of silver and 525,000 - 575,000 of gold, both on consolidated silver basis | $-3 to 75 cents, on consolidated silver basis | $195 million to $201 million |
| Ticker | Company | Balance Sheet financial leverage ratio. Debt-to-EBITDA ratio (vs industry median of 2.15) | Profitability ratio. EBITDA-to-Revenue margin ratio (vs industry median of 20.55%) | Location of mineral assets | Investment Risk |
| GOLD | Barrick Gold Corp | 0.58 as of Sept. 2020 | 70.54% | North America, Latin America, Africa and the Middle East | Low to Medium (as Argentina, Papua New Guinea and Mali could pose a threat to mining activities) |
| NEM | Newmont Corp | 1.25 as of Sept. 2020 | 49.11% | North America, Latin America, Africa and Australia | Low (as Argentina and Suriname could pose a threat to mining activities) |
| KGC | Kinross Gold Corp | 0.83 as of Sept. 2020 | 58.24% | Americas, West Africa and Russia | Low (as except for Russia, the other two regions do not pose any particular threat to mining activities) |
| AG | First Majestic Silver Corp | 7.36 as of Sept. 2020 | 6.55% | 3 Operating Mines in Mexico plus a silver stream in Ontario, Canada | Medium to Moderate High (as several areas in Mexico could pose a threat to mining activities) |
| PAAS | Pan American Silver Corp | 0.29 as of Sept. 2020 | 33.60% | Canada, Mexico, Peru, Argentina, and Bolivia. | Considerable risk as 80% of the total production comes from geographical regions where social, political and geophysical factors represent a threat to mining activities. |
Barrick Gold has a market cap of $46.15 billion, a 52-week range of $12.65 to $31.22, a price-book ratio of 2 and an enterprise value-Ebitda ratio of 6.29.
Newmont has a market cap of $58.82 billion, a 52-week range of $33 to $72.22, a price-book ratio of 2.33 and an enterprise value-Ebitda ratio of 10.17.
Kinross Gold has a market cap of $9.99 billion, a 52-week range of $2.72 to $10.32, a price-book ratio of 1.71 and an enterprise value-Ebitda ratio of 4.64.
Pan American Silver has a market cap of $6.92 billion, a 52-week range of $10.61 to $40.11, a price-book ratio of 2.82 and an enterprise value-Ebitda ratio of 15.08.
First Majestic Silver has a market cap of $2.42 billion, a 52-week range of $4.17 to $14.57, a price-book ratio of 2.96 and an enterprise value-Ebitda ratio of 100.25.
Wall Street recommends an overweight rating with an average target price of $34.92 per share of Barrick Gold, an overweight rating with an average target price of $81.04 per share of Newmont and an overweight rating with an average target price of $12.65 per share of Kinross Gold.
Furthermore, it issued a buy rating with an average target price of $43.53 per share for Pan American Silver and an overweight rating with an average target price of $14.48 per share for First Majestic Silver.
NovaGold Resources
Among small precious metals operators, investors should acquire some shares of NovaGold Resources Inc. (NG, Financial), a Canadian developer of gold mineral properties in the U.S.
The main asset of the company is represented by a 50% interest stake in the Donlin Gold project, which is located in Alaska, with Barrick Gold holding the other 50%. Here, the drilling campaign is proceeding very well, delivering assay results even beyond what the exploration team had initially forecasted. They are showing premises for future high-return mining activities as gold grades continue to improve, enhancing the confidence in the design that the future gold deposit will have.
The company is not producing any income, as the gold mine has yet to be constructed. However, the balance sheet is solid as GuruFocus assigned a score of 5 out of 10 for the financial strength, enabling the company to continue the exploration activities in Alaska without problems.
The stock performed amazingly over the third quarter, rising by nearly 30% and outperforming the VanEck Vectors Junior Gold Miners ETF (GDXJ, Financial) and gold futures by 16% and 24%.
Thus, the stock is positioned to jump when gold rises.
NovaGold Resources has a market cap of $3.61 billion, a 52-week range of $4.65 to $12.85, a price-book ratio of 31.01 and an enterprise value-Ebitda ratio of -130.65.
On Wall Street, the stock has one buy recommendation rating and a price target of $30 per share, marking a 177% upside from current levels.
Disclosure: I have no positions in any securities mentioned.
Read more here:
- A Trio of High Return Businesses With Robust Balance Sheets​
- A Trio of Non-Cyclical Stocks to Consider
- 3 Stocks Trading Below the Peter Lynch Fair Value
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