3 Gold Stocks to Watch in a Promising Industry

The prospects of Zacks Mining - Gold industry looks bright at the moment on the back of improving gold prices this year. The yellow metal had topped the $2,000 an ounce mark earlier and is currently trading at around $1,855 an ounce, riding on the back of geopolitical tensions and surging inflation.

With gold prices anticipated to gain further on demand-supply imbalance, stocks like Barrick Gold Corporation GOLD, Franco-Nevada Corporation FNV and Royal Gold Inc. RGLD 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 comprises companies engaged in extracting gold from mines, which are either underground or open pits. Mining is a long and complex process and requires significant financial resources. It entails exploration to evaluate the deposit's size, followed by assessing ways to extract and process the ore efficiently, safely and responsibly, and finally, the development of the mine before the actual mining process. It normally takes 10-20 years for a gold mine to produce material that can be refined. The players in the industry nowadays use a range of sophisticated techniques to extract gold and convert it into doré bars, which is an alloy of gold and silver, alongside other impurities. These are then sent for purification, following which the gold is purchased in the form of bars or coins or used in jewelry or for other purposes.

What's Shaping the Future of Mining-Gold Industry

Rising Gold Prices: Gold prices have been fueled by geopolitical crisis and persistently high inflation this year, which solidified its status as a safe-haven asset. Gold had even topped the $2,000 an ounce mark in March. Gold prices are currently at around $1,855 an ounce, up 1% so far this year. Recently, disappointing U.S. economic data and mounting concerns over U.S. economic growth have increased the yellow metal’s appeal to investors.

Labor Issues, Higher Costs Persist: The industry has been facing a shortage of skilled workforce, leading to a spike in wages. COVID-19-related absenteeism also remains a concern. The industry players have been 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, 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 now committed to cost-reduction strategies and digital innovation to drive operating efficiencies.

Investment Demand Remains Strong: Per the World Gold Council, in the first quarter of 2022, gold demand increased 34% year on year to 1,234 tons — the highest since the fourth quarter of 2018. It was mainly driven by strong ETF flows that witnessed its strongest quarterly inflows since the third quarter of 2020, fueled by safe-haven demand that offset weaker jewelry and retail investment. Jewelry demand was down 7% in the quarter, weighed down by softer demand in China and India, which together account for around 55-60% of total quarterly jewelry consumption. After a strong start to the year, demand in China came to a virtual halt in March as strict new lockdowns were imposed to contain a resurgence of COVID-19 cases. Meanwhile, in India, the lack of auspicious days, as well as higher gold prices, hampered gold purchases. Nevertheless, demand will pick up in India in the latter part of the year due to the timing of the festival and wedding season. Gold demand in China is likely to bear the brunt of the repeated lockdowns and the economic slowdown in the country.

Impending Demand and Supply Imbalance: Depleting resources, declining supply in old mines, and lack of new mines remain an inherent threat to the industry. Due to the scarcity of new discoveries and depleting existing resources, miners prefer to build up reserves through acquisitions rather than digging for new ones that are inherently risky and capital intensive. On the demand side, the use of gold in energy, healthcare, and technology is on the rise. The yellow metal has long been considered a safe-haven investment in times of financial or political uncertainty. Emerging market central banks are turning their attention to gold. So, there will be an eventual demand-supply imbalance that is likely to drive gold prices, which bodes well for the industry in the long haul.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Mining- Gold Industry, which is a 36-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #96, which places it at the top 38% of 256 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 Lags S&P 500 & Sector

The Mining-Gold Industry has underperformed the S&P 500 Index and the Basic Material sector in a year’s time. The stocks in the industry have collectively fallen 19.4%, compared with the S&P 500 and the broader sector’s decline of 7.5% and 8.9%, respectively.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month EV/EBITDA, which is a commonly used multiple for valuing gold-mining companies, we see that the industry is currently trading at 5.57X compared with the S&P 500’s 11.75X and the Basic Material sector’s forward 12-month EV/EBITDA of 4.46X. 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 9.240X and as low as 4.63X, with the median being at 6.61X.

3 Mining-Gold Stocks to Keep an Eye On

Barrick Gold: Its strong liquidity position and healthy cash flow position it well to take advantage of attractive development, exploration, and acquisition opportunities. The company’s growth projects — Turquoise Ridge third shaft, Goldrush and the Pueblo Viejo plant and tailings expansion — are currently in execution. These projects are advancing as per schedule as well as within budget, which underpins the next generation of profitable production from the core region. The combination of Turquoise Ridge and Twin Creeks delivers a tier-one asset with another in the making at Goldrush. The company maintained its target of zero net debt for the second consecutive year in 2022, which is commendable. GOLD anticipates attributable gold production in the range of 4.2-4.6 million ounces in 2022. The company has been delivering on its annual guidance targets for the past three years. The company’s shares have gained 9% so far this year.

The Zacks Consensus Estimate for earnings for this Toronto, Canada-based company’s fiscal 2022 indicates year-over-year growth of 5%. The Zacks Consensus Estimate has gone up 2.5% over the past 30 days. Barrick Gold has a trailing four-quarter earnings surprise of 11.4%, on average. GOLD has a long-term estimated earnings growth rate of 5% and a Zacks Rank #3 (Hold).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Price & Consensus: GOLD

Franco-Nevada Corporation: Franco-Nevada appears to be 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. The company sold 128,627 Gold Equivalent Ounces (GEOs) from precious metal assets in the first quarter of 2022 and is on track to meet the current year’s total GEOs guidance between 680,000 and 740,000. FNV’s shares have moved up 1% year-to-date.

The 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 has been revised upward by 3% over the past 30 days. The consensus mark indicates year-over-year growth of 6%. The Zacks Ranked #3 stock pulled off a trailing four-quarter earnings surprise of 0.01%, on average.

Price & Consensus: FNV

Royal Gold: The company's strong balance sheet, focus on reducing debt levels, and healthy cash position enable it to invest in properties with exploration and production upside. Focus on acquiring streams and addition of the high-quality, long-life Khoemacau development project will drive growth. The company remains focused on allocating its strong cash flow to dividends, debt reduction and new business. In November 2021, Royal Gold's board hiked the annual dividend by 17% to $1.40 per share. This is the largest percentage increase since 2013 and marks the company’s 21st consecutive annual dividend increase. Its shares have appreciated 8% so far this year.

The Zacks Consensus Estimate for Royal Gold’s fiscal 2022 earnings indicates year-over-year growth of 4%. The estimate has remained stable over the past 30 days. RGLD has a trailing four-quarter earnings surprise of 13.3%, on average. The company currently has a Zacks Rank #3 and a long-term estimated earnings growth of 10%.

Price & Consensus: RGLD

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