Gold miners are trading at their biggest discount :: InvestMacro


Amid a backdrop of high inflation, near-record high gold prices, and negative real rates, many gold bulls are perplexed by the lack of bullish follow-up in Gold Miners Index (GDX). This is because despite this favorable environment, the index is down 6% year-to-date and 40% from its Q3 2020 high.

However, it is important to note that gold producers are facing significant headwinds that have dented profit margins, including higher costs for labour, fuel and materials. So, while it has done historically well in this environment, some of the rise in gold prices has been offset by higher costs.

Given that GDX is filled with many high-cost producers with sub-par track records, this affected the performance of the index, sending almost all stocks in the sector and GDX down.

The good news is that this 22-month decline (August 2020 – June 2022) has left some of the best quality miners at their lowest ratings since the first quarter of 2020.

In this update, we’ll look at three miners who have not only been hit by inflationary pressures but are trading at a huge discount to their historical multiples: Kinross Gold (KGC)And the Alamos Gold (AGI)And the Wisdom Mines (WDOFF).

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Kinross Gold (KGC)

Beginning with Kinross, the company is a 2.0 million ounce producer and has operations in Mauritania,
Brazil, Nevada, Alaska and Chile.

The company has performed the worst among its larger peers over the past year, as it was penalized with the acquisition of a project in development in Canada and after being stripped of its Russian assets this spring after the invasion of Ukraine.

While the latest development wiped out more than $1.0 billion in net asset value and 300,000 ounces of annual gold production, the company may be in a better position after the divestment, even if the assets were sold at less than fair value. This is because Kinross wasn’t getting much value for its Russian assets (Kupol, Udinsk) anyway and can now get a higher multiplier with a portfolio focused on the Americas.

Understandably, investors are disgusted with the stock’s performance, which is down 60% since the third quarter of 2020. However, at current prices, the correction appears to be exaggerated.

This is because Kinross has historically traded at 7x cash flow and is currently trading at 3.5x its fiscal year 2023 cash flow estimates ($1.20 per share). Although I think 7x cash flow is a high estimate and 5.5x cash flow is more appropriate, this still translates to a fair value of $6.60 per share, or more than 65% up from current levels.

It’s also important to note that FY2023 cash flow doesn’t take into account any upside from its recently acquired Dixie venture in Canada, which appears to be home to more than 9 million ounces of gold and could produce more than 425,000 ounces annually at a price below 800. dollars/oz costs.

Kinross Multiple Historical Cash Flows

Source: Kinross Historical Cash Flow Multiple,

Since production is not expected to start until 2028 at Dixie, this asset has been discounted and Kinross has not received much value for the asset. However, I see a fair value of this asset of $1.7 billion, which translates to more than $1.50 per share in additional long-term upside.

While the stock’s 18-month fair value is 65% higher, the stock has the potential for long-term compounding if it can be successfully executed in Dixie. Looking at this huge fair value discount combined with the 3.0% + dividend yield, I see the stock steal at $4.00

Alamos Gold (AGI)

The second name worth watching closely is Alamos Gold, a mid-tier gold producer that’s currently floundering
of 450,000+ ounces annually from its three operations in Canada and Mexico.

However, the inventory has been on the decline lately, as its costs have risen above $1,200/oz and are expected to come in at levels above the industry average in 2022.

While this certainly dampens short-term margin expectations (costs $1,130 an ounce in 2021), Alamos will look like a very different company by the second half of 2025. This is because it is currently building a Phase 3 expansion on its high-quality island gold mine, which will raise Production from about 125,000 ounces per year to 230,000 ounces per year.

In the meantime, the company aims to establish a fourth mine in Manitoba (Lake Lane) and add another
150,000 ounces annually by 2026.

Alamos Gold Growth Plan

Source: Alamos Gold Growth Plan, Company Presentation

If the Alamos was just a growth story, it would be unique, and we were already expecting it to lead
Double premium in a sector where growth is hard to find.

However, it is important to note that this growth will be accompanied by significant margin expansion and jurisdictional upgrading. This is because a third-phase expansion, which will nearly double throughput, is expected to contribute to costs under $600/oz on the island.

At the same time, Lynn Lake costs should be less than $975 an ounce. The result will be a transformation from a 450,000-ounce product with margins of $600/ounce ($1800/ounce for gold) to a 750,000-ounce product with margins of $1,000/ounce for $1,800/ounce for gold.

Finally, it will see its exposure to Mexico (the Tier 2 rated jurisdiction) drop from 30% to 20%. The result is a company that will enjoy expanding at the P/NAV multiplier at the same time that its cash flow increases exponentially.

Based on this view, I see a fair value of the stock above $10.00 and I see this decline in AGI as a gift.

Wisdom Mines (WDOFF)

The last name that has become catchy is Wesdome Mines, a start-up producer that operates out of Canada
One mine is in Ontario and another is in Quebec.

While junior producers are a dime a dozen, Wesdome is special because it has two of the world’s best gold mines, and is busy ramping up to full production in one of them (Kiena) over the next year.

Given grades of gold over 10 grams per ton, they use significantly less fuel and labor than their counterparts per ounce of gold produced, since they move less than one-sixth the volume of rocks due to their grades.

High quality gold mines in the world

Source: High-quality gold mines worldwide, company filings, author chart

Wesdome’s steady increase in Kiena means that while its costs may currently be above $1,100/oz,
They are expected to fall below $825 an ounce by 2024.

Looking at this enviable position as a company with significant margin expansion on the horizon in a period of slight margin contraction across the sector, I see any pullbacks below $8.00 (key technical support level) as buying opportunities.

last thoughts

With gold miners trading their biggest discount to NAV in two years, I now see a good time to start adding some exposure. Looking at the improved margin profiles of KGC, AGI, and WDOFF looking to 2025, I think these are three of the best ways to get a feel for the sector.

Disclosure: I am tall AGI, KGC

Taylor Dart
Contributor to

Disclaimer: This article is the opinion of the contributor himself. Taylor Dart is not a registered investment advisor or financial planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation in connection with any securities transaction. The information in this writing should not be construed as financial or investment advice on any subject. Taylor Dart expressly disclaims all liability with respect to actions taken based on any or all of the information in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying precious metal stocks with small caps, position sizes should be limited to 5% or less of an individual’s portfolio.

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