Gold Miners On The Sale Rack

It’s been a rough year for the major market averages, with the major indexes down roughly 20% in their worst year since 2008.

This poor performance is not surprising after a decade-long bull market that pushed valuations to historic extremes combined with an ultra-hawkish Federal Reserve that has aggressively hiked rates into a recessionary environment.

At the same time that higher rates have dented earnings and resulted in layoffs due to increased interest expense, the outlook for forward earnings is less clear, with consumer spending pulling back and reduced sales leverage for most corporations.

However, one sector stands out and has been trending higher over the past two months: the gold mining sector. In fact, the Gold Miners Index (GDX) has clawed back from a 30% year-to-date loss to just a 13% year-to-date loss, and many gold miners are trading in positive territory year-to-date.

Given that they’ve suffered through a much larger bear market than the Nasdaq (COMPQ) with a ~55% decline, these names are not only undervalued, but they’re long-term oversold, and the sector could have meaningful upside as we head into a strong seasonal period for the GDX.

In this update, we’ll look at two of the more undervalued names in the sector:

Osisko Gold Royalties (OR)

Osisko Gold Royalties (OR) is a $2.23 billion company in the precious metals royalty/streaming space.

This means that It finances developers, producers, and explorers in the commodity sector with a gold/silver focus, providing them capital upfront to build or expand their assets.

In exchange, Osisko Gold Royalties receives either a royalty or stream on the asset over its mine life, with the latter giving it a right to buy a percentage of metal produced at a fixed cost that is well below spot prices.

The result is that royalty/streaming companies have their tentacles in several projects, have their revenue streams spread across several countries, and are inflation-resistant. Hence, they are superior businesses from a margin and risk standpoint vs. most gold producers.

So, what’s so special about Osisko? Continue reading "Gold Miners On The Sale Rack"

Gold Sector Opportunities: OR & ARNGF

Following a brutal two years for the Gold Miners Index (GDX), the sector has begun to perk up recently, advancing more than 20% off its lows to new 50-day highs.

This recovery can be attributed to the recent rally in gold back above the psychological $1,750/oz level and the fact that many miners had overshot to the downside during this bear market. In fact, many were trading at their most attractive valuations since 2018, when the gold price was hovering below $1,250/oz, and they were much less profitable.

Given the steep decline in the sector, several gold miners are trading at deep discounts to fair value.

In this update, we’ll look at two more attractive opportunities in the gold sector. Not only do these two companies have industry-leading growth profiles, but they have been beaten up sufficiently due to negative sentiment sector-wide that they’re offering considerable margins of safety at current levels.

Osisko Gold Royalties (OR)

Osisko Gold Royalties (OR) is a $2.33BB market cap royalty/streaming company in the gold sector, giving it a very low-risk business model. This is because the company generates revenue and cash flow from royalties and streams that it has purchased from developers and producers in exchange for helping them fund the construction or expansions of their projects/operations.

The result is that Osisko does not have to pay for sustaining capital to maintain these mines, it does not have to pay growth capital to expand these mines, and it is not subject to inflationary pressures if we see rising labor, fuel, explosives, or cyanide costs. Given this attractive business model, the company has reported year-to-date cash margins of 93% and 92% in its most recent quarter.

Osisko Chart

(Source: Company Presentation

Continue reading "Gold Sector Opportunities: OR & ARNGF"

Buying Opportunity For These Two Gold Miners

While the S&P-500 (SPY) has taken a beating over the past month, leaving the index 18% from its highs, the damage inflicted has been tame relative to the shellacking we’ve seen in the Gold Miners Index (GDX).

Not only has the GDX’s decline been double that of the S&P-500, but the most recent drop is one of the worst in a decade in terms of velocity. This is because the GDX was down 44% in just 95 trading days last Friday, translating to an annualized decline of 79%.

Daily Sentiment Index Data

(Source: Daily Sentiment Index Data, Author’s Chart)

This decline, coupled with muted 10-year returns since the peak of the last bull market cycle (2011), and lifeless 2-year returns since the August 2020 peak, has led to despair in the sector, with many investors not even interested in looking at their portfolios if they hold precious metals stocks.

I believe this has bred conditions for a violent rally to the upside, especially with sentiment for gold (GLD) sitting at its lowest levels in 18 months, as most investors have also given up on the metal.

In this update, we’ll look at two high-quality miners that have been thrown out with the proverbial bathwater:

Agnico Eagle Mines (AEM)

Agnico Eagle Mines (AEM) is the world’s 3rd largest gold producer, on track to produce ~3.3 million ounces of gold in 2022 from more than ten mines globally. Continue reading "Buying Opportunity For These Two Gold Miners"

3 Gold Miners Trading At Dirt-Cheap Valuations

It's been a volatile start to the year for the major market averages, but one sector that's managed to hold up well among the carnage is the Gold Miners Index (GDX). In fact, the index is up 10% year-to-date on the back of higher gold prices. While some investors might fear that they've already missed the move and it's too late to chase, it's important to note that gold has begun to outperform the S&P 500 (SPY) after a multi-year downtrend, which typically suggests we're in the early innings of the move for the GDX. In addition, while a few names are outside of low-risk buy zones, several are dirt-cheap, even after the sharp rally in Q1. Let's take a closer look below:



When it comes to getting exposure to gold, the Gold Miners Index is typically the vehicle of choice for investors. However, the issue with the GDX is that it's made up of more than 50 names, with many having weaker balance sheets, a poor track record operationally, and razor-thin margins. Unfortunately, the latter has been exacerbated by inflationary pressures. Therefore, by owning the index, one is diluting their returns with the laggards. For this reason, I prefer playing the sector by owning the highest-quality names when they go on sale. Continue reading "3 Gold Miners Trading At Dirt-Cheap Valuations"