TipRanks
JP Morgan claims that these three gold stocks could rise 40% (or more)
Let’s talk about gold. Precious metal is the traditional safe haven investment, supported by its use – starting 5,000 years ago – as a reliable store of value. Investors looking to protect their portfolio and secure their wealth traditionally buy heavily in gold, and the price of gold has sometimes been used as a proxy (albeit in reverse) for general economic health. In a recent report, investment firm JP Morgan looked at the state of the gold industry at length – specifically, the gold mining industry. Analyst Tyler Langton points to an underlying paradox in two basic facts about gold mines. “Over time, in a commodity business, lower-cost producers with longer-lived assets tend to be the relative winners … Gold mines, when compared to base metals, generally have much shorter lives ( sic), and miners need to focus on replenishing reserves to maintain production levels, ”noted Langton. At first glance, Langton’s paradox may appear to point to heavy investments in gold mines. After all, they are producers of high-risk commodities. But the current times are really good for gold miners. Prices are high compared to recent years; the metal is running at just under $ 1,800 an ounce now, but peaked above $ 2,000 in August last year, at the height of the corona shutdowns, and reached $ 1,200 just 18 months ago. Current high prices bode well for producers. Langton says he believes there is support for current prices, with gold mines being seen as a hedge against ‘macro uncertainty’. He believes that the main sources of support will be found in “real interest rates remaining lower for longer and COVID-19 related stimulus measures continuing to expand the central bank’s balance sheets”. With that in the background, Langton and his colleagues began to select the gold mining stocks they consider to be winners in the current environment. It is not new that they like companies that show discipline in M&A activity, focus on free cash flow and solid returns to shareholders. Using the TipRanks database, we obtained the details of several of your recent choices. Are they as good as gold? Analysts seem to think so; all are classified as Buy and potentially offer a significant advantage. Let’s go deeper. Kinross Gold Corporation (KGC) First, Kinross Gold is a mid-cap company – valued at $ 8.6 billion – with active mining operations in the US, Brazil, West Africa and Russia. Together, these operations have proven and probable gold reserves of 29.9 million ounces. The company is targeting 2.4 million ounces in total production for 2021, increasing to 2.9 million ounces by 2023. The company’s profitability can be seen by the cost of sales per ounce, $ 790, and the total cost of support, of $ 1,025 per ounce. With gold currently selling for $ 1,782 on commodity exchanges, Kinross’ short-term success is clear. Two sets of statistics highlight Kinross’ profitability. First, the company’s recent record of quarterly results shows a steady increase in revenues and profits. In addition to the fall in 1Q20, at the beginning of the corona crisis, Kinross’ revenues have been growing steadily since the beginning of 2019 – and even in 2020, each quarter increased year on year. After 7 years without dividend payments, Kinross has used its strong performance in recent months to restore the company’s dividends. Payments are still made irregularly, but since the announcement in September 2020 that the dividend would be reinstated, two payments have been made and a third has been announced for March this year. Each payment was 3 cents per share, which translates into a modest 1.6% yield. The main point here is not the strength of income, but the confidence that management has shown in the near to medium term by restarting the payment of dividends. Based on current production projections, payments are expected to continue until 2023. Tyler Langton, in his notes on Kinross, comes to an optimistic conclusion: “Given its expected growth projects and additional project pipeline, we believe Kinross will be able to maintain an average annual production of 2.5 mm oz. over the next decade. The company has an attractive cost profile and we expect costs to decrease in the coming years. The company is also expected to generate strong and attractive levels of FCF at current gold prices, and we expect Kinross to direct that money towards internal growth projects and their dividends. ” In line with these comments, he selects Kinross as JPM’s ‘best choice in the gold sector’ and values the shares as Overweight (ie a Purchase). Its $ 11 target price suggests a potential increase of 61% next year. (To view Langton’s track record, click here) Kinross obtains a Strong Buy recommendation from the analyst consensus, based on a 6 to 2 split between Buy and Retention reviews. Wall Street analysts set an average price target of $ 11.25, slightly more optimistic than Langton’s, and implying a 64% increase in one year from the current $ 6 trading price, 85. (See KGC’s stock analysis at TipRanks) SSR Mining, Inc. (SSRM) Moving to northern Canada, now let’s take a look at Vancouver-based SSR Mining. This is another medium-sized mining company, producing gold and silver in quantity through four active mines in Canada, the United States, Argentina and Turkey. Canadian, American and Turkish operations mainly produce gold, while Operation Puna is the largest silver mine in Argentina. Although the SSR lost its revenue and result estimates in its latest quarterly report, for the full year 2020 production figures, the company followed the guidance previously defined. Gold production in the year reached 643,000 ounces, with 31% of that total coming in the fourth quarter. Silver production at the Puna mine reached 5.6 million ounces, exceeding guidance figures. The fourth quarter’s production was 39% of the total. Last November, the company announced that it will start a dividend policy starting in 1Q21. The ‘basic dividend’ will be set at 5 cents per share, or a yield of 1%; as in the case of the KGC above, the main point is not whether the dividend is high or low, but whether management is starting to pay it – a sign of confidence in the future. Langton bases his assessment of SSRM on his strong free cash flow forecast, writing: “With current gold prices at term, we estimate that SSR will generate about $ 400 million FCF in 2021 and about $ 500 million per year from 2022-2024. In addition, from a 2021 basis, we anticipate that the SSR would generate a cumulative 2021-2025 FCF of $ 2.3 billion, or about 59% of its current market capitalization … ”In line with your comments Langton puts an overweight (ie buy) valuation of the stock, along with a target price of $ 24, which indicates a 60% rise in the next 12 months. (To see Langton’s history, click here) There are 8 recent reviews on SSRM stocks – each of which is a Buy, making the Strong Buy analyst’s consensus rating here unanimous. The stock is selling for $ 15.25, and its hefty average price of $ 28.78 suggests a 89% increase in one year. (See SSRM stock analysis at TipRanks) Newmont Mining (NEM) Last on the list, Newmont is the largest gold miner in the world, boasting a market capitalization of $ 45.78 billion and active production in a variety of metals, including gold, silver, copper, zinc and lead. The company has assets – both operations and prospects – in North and South America, Africa and Australia, and is the only gold miner listed on the S&P 500. With that last detail in mind, it is important to note that NEM’s shares have risen 29% in the last 12 months – more than S&P’s 16% gain in the same period. In 3Q20, the company posted revenue of US $ 3.12 billion. Although this did not live up to the forecast, it improved by 5.4% in the third quarter of the previous year. The third quarter results were also a record for the company, with free cash flow of $ 1.3 billion. The results below expectations were also a common standard for the company’s performance in 2020 in the first and second quarter. The corona crisis depressed the results, but even the depressed results rose year after year. Newmont has an active capital return program for shareholders. Since the beginning of 2019, the company has been using dividends and share repurchases to return capital to stakeholders, worth $ 2.7 billion. Last January, Newmont announced a $ 1 billion continuation of share repurchases. Looking at 2021, the company also announced a new dividend structure, setting the basic payment at $ 1 per annualized share, and reiterated its commitment to return on capital. Michael Glick of JPM led the note on Newmont, beginning to recognize the company’s strong production: “We expect NEM’s attributable gold production to remain relatively stable over the period 2021-2025 at around 6.5- 6.7 mm ounces … “- Long-term production outlook Glick continued:“ In terms of production, the ongoing expansion in Tanami is expected to deliver incremental production and lower cash costs starting in 2023. Furthermore, we expect that Newmont approves its Ahafo North and Yanacocha Sulfides projects this year, which should bring incremental production to the company after the approximately three-year development schedule ”. Glick likes FCF and Newmont’s production numbers, using them to support his overweight rating (purchase). Its target price of $ 83 implies a 46% increase for the coming months. (To see Glick’s history, click here) Newmont, with all its strength, still gets a Moderate Buy rating from the analyst consensus. This is based on 8 reviews, including 5 purchases and 3 retentions. The average price target is $ 74.97, suggesting room for a 31% increase from the current trading price of $ 56.99. (See the NEM stock analysis on TipRanks) To find good ideas for trading gold stocks with attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that brings together all TipRanks stock insights. Disclaimer: The opinions expressed in this article are exclusively those of the analysts presented. The content should be used for informational purposes only. It is very important to do your own analysis before making any investments.