While 2022 was a year to forget for the major market averages, the Gold Miners Index (GDX) managed to claw its way back from significant underperformance to finish the year down just 10%, outperforming the S&P 500 (SPY) by 1000 basis points.
Fortunately for investors in the gold space, we’ve seen follow-through to this outperformance to start the new year, with the GDX up 13% year-to-date and back into positive territory on a 1-year trailing basis.
However, while the index may be up sharply off its lows and gold miners are outperforming most stocks, this doesn’t mean that any miner can be bought on dips, and a few have become expensive and increasingly risky now that they’re up more than 50% off their Q3 2022 lows.
In this update, we’ll look at two names that continue to fire on all cylinders and are much safer ways to buy any upcoming pullbacks in the space, given their operational excellence, attractive dividend yields, and superior diversification vs. their peer group.
Let’s take a closer look below:
Agnico Eagle Mines (AEM)
Agnico Eagle Mines (AEM) is the world’s third-largest gold producer and has been one of the busiest companies in the sector from an M&A standpoint.
In Q1 2022, the company closed its merger with the 9th largest gold producer globally, Kirkland Lake Gold, and is now in the process of acquiring Yamana Gold’s Canadian assets in a two-way acquisition with Pan American Silver (PAAS).
The result of these two acquisitions is that the company will grow into a ~3.9 million-ounce producer by 2024 (assuming the Yamana deal closes), placing it just behind Barrick Gold (GOLD) for the #2 spot among the world’s largest gold miners.
The result of this M&A activity is that Agnico Eagle now has ten mines in the safest mining jurisdictions globally (up from seven previously) and will gain the other 50% ownership of one of its largest gold mines in Quebec if the Yamana deal closes.
Plus, while Agnico Eagle may not be the largest gold producer, it is one of the top-6 lowest cost gold producers globally with all-in-sustaining costs below $1,000/oz and has one of the best pipelines in the sector, sitting on multiple world-class assets with some able to leverage off existing infrastructure, resulting in lower capital expenditures and benefit from synergies.
One example is Upper Beaver in Ontario, which sits in the same camp as its newly acquired Macassa Mine, a gold-copper project that could enjoy industry-leading margins due to by-product credits.
Another is its recently acquired Wasamac Project, a high-grade underground project in the Abitibi Region of Quebec that could potentially provide ore feed for mills in the region with excess capacity.
Finally, while the San Nicolas Project that it partnered on with Teck may not have clear synergies, this is one of the highest-margin VMS deposits globally, and it should enjoy 60% plus margins at current commodity prices.
Given Agnico Eagle’s unique position with multiple assets in safe jurisdictions and a development pipeline that could allow the company to grow production to 5.0+ million ounces per annum without any further M&A, I see the stock as one of the best ways to get exposure to gold.
This is especially true given that few million-ounce producers offer meaningful growth, which is related to the fact that it’s harder to grow once miners reach a certain scale.
Plus, Agnico Eagle can be considered a “sleep well at night miner", operating out of Canada, Finland, Australia, and Mexico - which are ranked the safest jurisdictions globally.
So, while I have no plans to add to my position here at $58.00, I would view any sharp pullbacks in the stock as buying opportunities.
Barrick Gold (GOLD)
Barrick Gold (GOLD) is the world’s second-largest gold producer and owns the most Tier-1 scale (500,000+ ounces of production per annum) among its peers, but the stock has seen lifeless share-price performance over the past decade.
This can be attributed to the company's heavy debt under its previous management, evidenced by net debt of more than $10 billion during the 2011-2015 secular bear market for gold.
The weaker balance sheet forced the company to divest some assets at the worst possible time, and the unfavorable position of being leveraged in a secular bear market earned Barrick the title of being of the worst-performing gold producers.
However, following the merger of equals with Randgold in 2018, the company’s new CEO has done an incredible job turning the company around.
Not only does the company have a net cash position today, but it has an attractive dividend yield of more than 3.0% and is aggressively buying back shares, regularly buying back over 1 million shares per week in Q3 and Q4.
Meanwhile, from an operational standpoint, its new CEO Mark Bristow has turned around several of its operations.
One major example is the agreed-upon joint venture in Nevada to take the borders off its operations and allow for synergies to make both its operations and Newmont’s operations much leaner.
Unfortunately, we haven’t seen the fruits of this hard work from a headline standpoint, given that Barrick’s production has declined since 2019, and its costs have risen sharply due to inflationary pressures.
Fortunately, this will change in 2023, with production hitting a major trough in 2022 at 4.14 million ounces but with growth to ~5.0+ million ounces by the end of the decade.
This growth will come from multiple assets, and costs are expected to drop by more than $200/oz in the same period as we see several assets optimized and lower-cost assets come online.
The result is that Barrick is finally investable and trades at a reasonable price, given that the stock remains stuck in a multi-decade downtrend.
Based on what I believe to be a fair cash flow multiple of 10.0 and FY2023 cash flow per share estimates of $2.35, I see a fair value for Barrick of $23.50, pointing to an 18% upside from current levels.
However, this assumes that we don’t see further strength in copper and gold prices, which could push its price target closer to $25.00.
At a current share of $19.80, this doesn’t translate to enough margin to rush into the stock just yet, given that I prefer a minimum 25% discount to fair value. However, if we were to see GOLD pullback below $17.70, I would view this as a buying opportunity.
Although Agnico Eagle Mines and Barrick Gold are two best-of-breed names in the sector, I have never seen much value in chasing rallies, so I have no plans to add to my positions in either stock here, given that they’ve had a nice run.
However, if we saw a sharp pullback in these names to unwind their current overbought conditions, I would view this as a buying opportunity.
Hence, for investors looking for exposure to gold, I believe these are two liquid leaders with generous shareholders returns that should be at the top of one’s watchlist.
Disclosure: I am long GOLD, AEM
Disclaimer: This article is the opinion of the contributor themselves. 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 regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in 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 small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.