JP Morgan says these 3 gold stocks could rise 40% (or more)
Let’s talk about gold. The precious metal is the traditional safe-haven investment, supported by its use for 5,000 years as a reliable store of value. Investors looking to protect their portfolios and secure their wealth have traditionally bought heavily in gold, and the price of gold has sometimes been used as an indicator (albeit the reverse) of general economic health. In a recent report, investment firm JP Morgan extensively examined the state of the gold industry in particular, the gold mining industry. Analyst Tyler Langton points to an underlying paradox in two fundamental facts about gold mining. Over time, in a commodities business, the lowest cost producers with the longest-lived assets tend to be the relative winners Gold mining, relative to base metals, has typically a much shorter mine life (sic) and gold miners must focus on replacing reserves to maintain production levels, Langton noted. At first glance, the Langtons paradox may appear to be moving away from heavy investments in gold mining. After all, they are high-risk commodity producers. But the current times are actually pretty good for gold miners. The prices are high compared to the last years; the metal now costs just under $ 1,800 an ounce, but peaked above $ 2,000 in August of last year, at the height of the corona shutdowns, and it was as low as $ 1,200 ago is barely 18 months old. The current high prices bode well for producers. Langton says there is support for current prices, with gold and gold mining seen as a hedge against macro uncertainty. He believes that the main sources of support will be in real interest rates which will stay lower for longer and in stimulus measures linked to COVID-19 which will continue to widen central bank balance sheets. With this in the background, Langton and his colleagues began to select the gold mining stocks they see as winning in today’s environment. Not surprisingly, they like companies that are disciplined in M&A activity, that focus on free cash flow and strong returns for shareholders. Using the TipRanks database, we’ve retrieved the details of several of their recent picks. Are they as good as gold? Analysts seem to think so; all are rated Buy and potentially offer a significant benefit. Let’s take an interest. Kinross Gold Corporation (KGC) First of all, Kinross Gold is a mid-cap company valued at $ 8.6 billion with active mining operations in the United States, Brazil, West Africa and Russia. Together, these operations have proven and probable gold reserves of 29.9 million ounces. The company is heading towards 2.4 million ounces of total production for 2021, rising to 2.9 million ounces by 2023. The company’s profitability translates into cost of sales per ounce, at 790 $, and the all-in sustaining cost, at $ 1,025 per ounce. . With gold currently selling for $ 1,782 on the commodities exchanges, Kinross’s short-term success is clear. Two sets of statistics highlight the profitability of Kinross. First, the company’s recent record for quarterly earnings shows steadily increasing revenues and profits. Aside from a decline in 1Q20, at the onset of the corona crisis, Kinross revenue has grown steadily since the start of 2019 and even in 2020 each quarter has shown a year-over-year increase. After 7 years without a dividend payment, Kinross used its strong performance in recent months to restore the company’s dividend. Payments are still made irregularly, but since the announcement in September 2020 of the reinstatement of the dividend, two payments have been made and a third has been announced for March of this year. Each payout was 3 cents per share, which translates into a modest return of 1.6%. The key point here is not the strength of the return, but rather the confidence that management has shown in the short to medium term by boosting dividend payments. Based on current production projections, payments are expected to continue through 2023. Tyler Langton, in his notes on Kinross, comes to a bullish conclusion: given his expected growth plans and his pipeline of additional projects, we believe Kinross will be able to maintain the average annual production of 2.5mm oz. over the next decade. The company has an attractive cost profile and we expect costs to decrease over the next few years. The company is also expected to generate high and attractive levels of FCFs at current gold prices, and we expect Kinross to direct that cash to organic growth projects and its dividend. In line with these comments, he selects Kinross as JPM’s top pick in the gold sector and rates the stock as overweight (i.e. a buy). Its price target of $ 11 suggests a potential upside of 61% in the coming year. (To view Langtons’ track record, click here) Kinross achieves an analyst consensus Strong Buy recommendation, based on a 6 to 2 split between buy and hold criticism. Wall Streets analysts set an average price target of $ 11.25, slightly more bullish than Langtons, and implying a one-year rise of 64% from the current price of $ 6.85. (See review of KGC’s shares on TipRanks) SSR Mining, Inc. (SSRM) Heading north to Canada, we now take a look at Vancouver-based SSR Mining. It is another mid-cap mining company, producing gold and silver in quantity at four active mines in Canada, the United States, Argentina and Turkey. The Canadian, US, and Turkish operations primarily produce gold, while the Puna operation is Argentinas’ largest silver mine. While SSR missed both the high and low estimates from its last quarterly report, for production numbers for the year 2020, the company stuck to previously set guidance. Gold production for the year reached 643,000 ounces, of which 31% was in the fourth quarter. Silver production at the Puna mine reached 5.6 million ounces, exceeding indicative figures. Fourth quarter production represented 39% of the total. Last November, the company announced that it would begin a dividend policy from 1Q21. The basic dividend will be set at 5 cents per share, or a yield of 1%; as with KGC above, the key point is not whether the dividend is high or low, but whether management begins to pay it out as a sign of confidence in the future. Langton bases his assessment of the SSRM on his strong free cash flow forecast, writing: At current gold futures prices, we estimate that the SSR will generate almost 400mm FCF in 2021 and around 500mm per year in 2022 to 2024. Additionally, from a 2021 base, we forecast that the SSR would generate cumulative FCF from 2021 to 2025 of US $ 2.3 billion, or around 59% of its current market cap. Langton assigns an overweight (buy) rating to the stock, with a price target of $ 24 that indicates a 60% rise for the next 12 months. (To look at Langtons track record, click here) There are 8 recent reviews of SSRM stocks and each of them is a buy, making the Strong Buy analyst consensus rating here unanimous. The stock is selling for $ 15.25 and its robust average price target of $ 28.78 suggests a high 89% year-over-year rise. (See SSRM Market Analysis on TipRanks) Newmont Mining (NEM) Last on the list, Newmont is the world’s largest gold miner, with a market cap of $ 45.78 billion and active production in a variety metals, including gold, silver, copper, zinc and lead. The company has assets in both operations and prospects in North and South America, Africa and Australia, and is the only gold miner listed on the S&P 500. With this last detail in mind, It should be noted that NEM stocks are up 29% in the past 12 months more than the S&P gain of 16% over the same period. In 3Q20, the company posted sales of $ 3.12 billion. Although this missed the forecast, it improved 5.4% from the third quarter of previous years. The third quarter results were also a record for the company, with free cash flow of $ 1.3 billion. Lower than expected results were also a common pattern for the company’s performance in 2020 in the first and second quarters. The corona crisis depressed the results, but even the depressed results increased year over year. Newmont has an active shareholder return program. Since the start of 2019, the company has used both dividends and share buybacks to return capital to stakeholders, to the tune of $ 2.7 billion. Last January, Newmont announced a $ 1 billion lawsuit against share buybacks. For 2021, the company also announced a new dividend framework, setting the base payout at $ 1 per share annualized, and reiterated its commitment to return on capital. Michael Glick, JPM, led the note on Newmont, starting by acknowledging the strong production of the company: We expect gold production from NMS to remain relatively stable over the 2021-2025 period at around 6, 5 to 6.7 mm oz of the company’s medium-term production. Outlook Glick went on to say: In terms of production, the expansion underway at Tanami is expected to allow additional production and lower cash costs from 2023. Additionally, we expect Newmont to approve its Ahafo North and Yanacocha Sulfides projects. this year, which is expected to result in incremental production for the company after projects within a development timeframe of about three years. Glick loves Newmonts FCF and production numbers, using them to support his overweight (buy) rating. Its price target of $ 83 implies a 46% hike for the coming months. (To see Glicks history, click here) Newmont, for all its strength, still gets a moderate buy rating from analyst consensus. This is based on 8 reviews, including 5 purchases and 3 holds. The average price target is $ 74.97, which suggests a growth margin of 31% from the current price of $ 56.99. (See NEM Stock Market Analysis on TipRanks) Disclaimer: The opinions expressed in this article are solely those of the analyst presented. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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