The decline in their prices does not dampen our enthusiasm for them: gold mining stocks should catch up with gold towards the end of its bullish phase.
Donald Trump’s undeniable victory caused gold to lose some 8% in one week. Gold miners, who had not followed the previous surge in the yellow metal, abandoned more than twice as much. Gold is still flirting with record highs, while mining stocks often trade only half of their all-time highs.
Very cheap
However, the decline in their prices does not dampen our enthusiasm for them: they should catch up towards the end of gold’s bullish phase. The gold mining sector can be assessed by the ratio of mining stocks to physical gold. In January 2016, March 2020 and February 2024, the ratio was at its lowest level; the gold mines then shone. We believe they should show superb growth over the next 12 to 24 months. Today, the ratio between the price of tracker VanEck Gold Miners ETF (ticker GDX) and the price of gold is 72; over the past decade, it has only been higher in 7% of cases. From a historical perspective, gold mining stocks are therefore still very cheap at present. They will appreciate each other when the feeling towards them improves. The results of large mining operators are indeed progressing well.
Newmont: overreaction
The high price of gold has allowed Newmont Corp to produce a lot of cash. During the past quarter, the group was able to repay $233 million in debt and redistribute $786 million in share buybacks and dividends. The ratio of net debt to operating cash flow (Ebitda) has improved significantly, from 5.1 in the previous quarter to 2.6 today. Debt jumped after the acquisition of Newcrest Mining at the end of 2023; its reduction will make it possible to increase the current share buyback program from 1 to 3 billion dollars.
The only downside: due to soaring labor costs, the cost of extracting an ounce of gold has increased, to $1,475 ($1,375 anticipated in February). By increasing production, Newmont intends to bring it below $1,200 in the coming years.
This surprise increase in costs has caused the stock to lose 30% since the end of October. Investors forget, however, that the jump in the price of gold, from 2,000 dollars an ounce in February to 2,600 today, more than offsets the cost. The disproportionate sanction offers a nice window of entry, given the marked improvement in the financial situation and the enormous potential for long-term cost reduction.
Barrick Gold: barely in debt
Barrick Gold also benefited from the surge in gold prices: its earnings per share increased by 33% over 12 months. The group, however, saw its extraction cost per ounce of gold reach $1,472. Unlike Newmont, it hasn’t made any major acquisitions in recent years, so its net debt/Ebitda ratio has fallen from 0.13 in the previous quarter to 0.09 today. Barrick’s production (excluding possible acquisitions) is expected to jump by more than 30% by 2030. Enough to justify the purchase of the stock.
Franco-Nevada: major setback
Franco-Nevada is a streaming company: it finances mining companies in exchange for gold (65%), oil, silver or other metals. The average production cost of a troy ounce of gold equivalent is $290, for an average margin of $2,187 in the third quarter. The company suffered a major setback in 2023, when the Panamanian government forced it to close the Cobre Panama copper mine, one of its main assets (it provided more than 20% of its revenue). The price found itself under pressure, however giving additional recovery potential to the stock.
