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Let’s talk about gold. The precious metal is the traditional safe haven investment, backed 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 bought heavily into gold, and the price of gold has sometimes been used as a proxy (albeit an inverse one) for general economic health. In a recent report, investment firm J.P. Morgan took a long look at the state of the gold industry – specifically, the gold mining industry. Analyst Tyler Langton points out an underlying paradox in two basic facts about gold mines. “Over time, in a commodity business, the lowest cost producers with the longest life assets tend to be the relative winners… Gold mines, when compared to base metals, typically have much shorter mines (sic) lives, and the gold miners have to focus on replacing reserves to maintain levels of production,” Langton noted. At first glance, Langton’s paradox may seem to point away from heavy investments in gold mines. After all, these are high-risk commodity producers. But current times are actually pretty good for gold miners. Prices are elevated compared to recent years; the metal is running just under $1,800 per ounce now, but it peaked above $2,000 in August of last year, at the height of the corona shutdowns, and it was as low as $1,200 just 18 months ago. The current high prices bode well for producers. Langton states his belief that there is support for current prices, with gold and 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 central bank balance sheets.” With this in the background, Langton and his colleagues have begun selecting the gold mining stocks they see as winners in the current environment. Unsurprisingly, they like the companies that show discipline on M&A activity, a focus on free cash flow, and solid returns to shareholders. Using the TipRanks database, we’ve pulled up the details on several of their recent picks. Are they as good as gold? The analysts seem to think so; all are Buy-rated and potentially offer significant upside. Let’s dig in. Kinross Gold Corporation (KGC) First up, Kinross Gold, is a mid-cap company– valued at $8.6 billion – with active mining operations in the US, Brazil, West Africa, and Russia. Taken together, these operations have proven and probable gold reserves of 29.9 million ounces. The company is guiding toward 2.4 million ounces in total production for 2021, rising to 2.9 million ounces by 2023. The company’s profitability can be seen by cost of sales per ounce, at $790, and the all-in sustaining cost, at $1,025 per ounce. With gold currently selling at $1,782 on the commodity exchanges, Kinross’s near-term success is clear. Two sets of statistics highlight Kinross’ profitability. First, the company’s recent record of quarterly results shows steadily rising revenues and earnings. Aside from a dip in 1Q20, at the start of the corona crisis, Kinross’ revenues have been gaining steadily since the start of 2019 – and even in 2020, every quarter showed a year-over-year increase. After 7 years without dividend payments, Kinross used its strong performance in recent months to restore the company dividend. Payments are still made irregularly, but since announcing in September 2020 that the dividend would be reinstated, two payments have been made and a third has been announced for March of this year. Each payment has been for 3 cents per share, which translates to a modest yield of 1.6%. The key point here is not strength of the yield, but rather, the confidence that management has displayed in the near- to mid-term by restarted dividend payments. Based on current production projections, the payments are expected to continue until 2023. Tyler Langton, in his notes on Kinross, comes to a bullish conclusion: “Given its expected growth projects and pipeline of additional projects, we think Kinross will be able to maintain average annual production of 2.5mm oz. over the next decade. The company has an attractive cost profile, and we expect costs to decrease over the next several years. The company should also generate attractive strong levels of FCF at current gold prices, and we expect Kinross to direct this cash toward internal growth projects and its dividend.” In line with these comments, he selects Kinross as JPM’s ‘top pick in the gold sector,’ and rates the stock as Overweight (i.e., a Buy). His $11 price target suggests a 61% upside potential in the coming year. (To watch Langton’s track record, click here) Kinross gets a Strong Buy recommendation from the analyst consensus, based on a 6 to 2 split between the Buy and Hold reviews. Wall Street’s analysts have set an average price target of $11.25, slightly more bullish than Langton’s, and implying a one-year upside of 64% from the current trading price of $6.85. (See KGC stock analysis on TipRanks) SSR Mining, Inc. (SSRM) Moving up north to Canada, we now take a look at Vancouver-based SSR Mining. This is another mid-cap mining company, producing gold and silver in quantity through four active mines in Canada, the US, Argentina, and Turkey. The Canadian, US, and Turkish operations produce primarily gold, while the Puna operation is Argentina’s largest silver mine. Although SSR missed on both the top- and bottom-line estimates in its latest quarterly report, for the 2020 full-year production numbers, the company met the previously set guidance. Gold production for the year hit 643,000 ounces, with 31% of that total coming in the fourth quarter. Silver production at the Puna mine reached 5.6 million ounces, beating the guidance figures. Fourth quarter production was 39% of the total. Last November, the company announced that it will be initiating a dividend policy starting in 1Q21. The ‘base dividend’ will be set at 5 cents per share, or a 1% yield; as with KGC above, the key point is not whether the dividend is high or low, but that management is starting to pay it out – a sign of confidence in the future. Langton bases his assessment of SSRM on its strong free cash flow forecast, writing, “At current gold forward prices, we estimate that SSR will generate close to $400mm of FCF in 2021 and around $500mm per year from 2022-2024. Furthermore, starting from a 2021 base, we forecast that SSR would generate cumulative FCF from 2021- 2025 of US$2.3bn, or roughly 59% of its current market cap…” In line with his comments, Langton puts an Overweight (i.e. Buy) rating on the stock, along with a $24 price target that indicates a 60% upside for the next 12 months. (To watch Langton’s track record, click here) There are 8 recent reviews on SSRM shares – and every single one of them is a Buy, making the Strong Buy analyst consensus rating here unanimous. The stock is selling for $15.25, and its robust $28.78 average price target suggests a high 89% one-year upside. (See SSRM stock analysis on TipRanks) Newmont Mining (NEM) Last on the list, Newmont, is the world’s largest gold miner, boasting a $45.78 billion market cap, 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’s worth noting that NEM shares are up 29% in the last 12 months – more than the S&P’s gain of 16% over the same period. In 3Q20, the company showed $3.12 billion in revenue. While this missed the forecast, it did improve on the prior year’s Q3 by 5.4%. The Q3 results were also a company record, with a free cash flow of $1.3 billion. Results below expectations were a common pattern for the company’s 2020 performance in Q1 and Q2, as well. The corona crisis depressed results, but even the depressed results were up year-over-year. Newmont has an active capital return program for shareholders. Since the beginning of 2019, the company has used both dividends and share repurchases to return capital to stakeholders, to the tune of $2.7 billion. This past January, Newmont announced a $1 billion continuation of the share repurchases. Looking ahead to 2021, the company has also announced a new dividend framework, setting the base payment at $1 per share annualized, and reiterated its commitment to capital return. JPM’s Michael Glick led the note on Newmont, starting out by acknowledging the company’s strong production: “We are forecasting NEM’s attributable gold production to remain relatively steady over the 2021-2025 time frame at around 6.5-6.7mm oz…” Of the company’s mid-term production prospects Glick went on to say, “In terms of production, the ongoing expansion at Tanami should deliver incremental production and lower cash costs starting in 2023. Additionally, we expect Newmont to approve its Ahafo North and Yanacocha Sulfides projects this year, which should bring on incremental production for the company after the projects’ roughly three-year development time-line.” Glick likes Newmont’s FCF and production numbers, using them to back his Overweight (Buy) rating. His $83 price target implies an upside of 46% for the months ahead. (To watch Glick’s track record, click here) Newmont, for all its strength, still gets a Moderate Buy rating from the analyst consensus. This is based on 8 reviews, including 5 Buys and 3 Holds. The average price target is $74.97, suggesting room for 31% growth from the current trading price of $56.99. (See NEM stock analysis on TipRanks) Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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