Markets
KGC

Gold Stocks Placed Well for Long-Term Growth

An image of a stock chart
Credit: Shutterstock photo

After years of languishing prices declining output from existing mines, concerns over Brexit and China worries have turned the tables for the yellow metal. There are plenty of reasons to be optimistic about the gold mining industry for both the short term and the long term. Below, we have discussed what investors in the gold mining sector can look forward to in the coming months and years.

Asia Will Be a Long-Term Growth Drivers

Over the last decade, combined demand for gold from India and China has soared 71%. These two markets roughly account for 54% of consumer gold demand, up from 33% in 2005. This figure is expected to go up to 60% in 2017. Asia is now less economically dependent on the West and has shown relatively strong growth since the global financial crisis, despite persistently weak growth in the US and Europe.

India has a strong tradition of investing in gold, mainly in jewelry. Demand mostly increases around the wedding and festive seasons, which begin from mid-to-late August and continue until January. Expenditure on gold can account for almost 30% of the total wedding cost. This gives a boost to local currency demand and raises gold prices .

In China, people view gold, whether in the form of bars, coins or jewelry, as a natural vehicle for savings and diversification. Gold is embedded in China's culture and the Chinese New Year and weddings are key events for the country's gold consumption. In China, although demand might drop from the highs of 2013, growth remains intact.

A continuous shift toward higher-margin products has lately been observed in the Chinese jewelry market. Gem-set and 18-carat gold items are becoming increasingly popular, with the latter largely gaining popularity among the younger generation. Producers are also playing a key role in promoting these products given their higher margins.

The World Gold Council anticipates demand from China to grow at least another 20% by 2017. While China's middle class is expanding, India has a comparatively low level of per capita gold holdings. The powerful combination of increasing urbanization and strong cultural affinity for gold bodes well for the metal's demand in both these countries.

China's central bank also continues to purchase the precious metal on a monthly basis, as it sees value in diversifying in gold. People's Bank of China (PBOC) now holds a total of 57.18 million ounces of gold. Currently, China's gold reserves are ranked fifth in the world, behind the U.S., Germany, Italy and France.

U.S Markets Hold Promise

Demand for gold jewelry in the first half of 2016 in the U.S at 48.6 tons was the strongest since 2009. Consistent, albeit moderate economic growth, improving employment levels and growth in consumer confidence are supporting demand.

Revived Appetite for Acquisitions

Canada's Kirkland Lake Gold will buy Newmarket Gold Inc. in a bid to create a new company with a market capitalization of C$2.4 billion ($1.83 billion) with the capability to produce over 500,000 ounces of gold annually.

Vancouver-based Tahoe Resources Inc.'s (TAHO) acquisition of Lake Shore Gold Corp. will address challenges faced by both companies. The transaction added Timmins West and Bell Creek mines in Timmins, Ontario, to Tahoe's holdings, which include mines in Guatemala and Peru. The combined entity is expected to produce 370,000-430,000 ounces of gold in 2016 at total cash costs of $675-$725 per ounce and all-in costs of $950-$1,000 per ounce. Last year, Tahoe had bought a smaller rival Rio Alto Mining to expand its presence in Latin America.

Goldcorp Inc. (GG) has acquired Kaminak Gold Corp. Kaminak's primary asset is the wholly owned Coffee Gold project - a hydrothermal gold deposit located at Yukon. This project has considerable potential for near-mine discoveries, with mineralization remaining open along strike and at depth.

The Coffee gold deposit currently has total indicated gold mineral resources of 3 million ounces and total inferred gold mineral resources of 2.2 million ounces. The acquisition is in sync with Goldcorp's strategy of aligning with smaller exploration companies to identify and develop mining districts with large exploration potential that can grow its net asset value per share.

Seabridge Gold, Inc. (SA) acquired SnipGold and its Iskut project which is a gold-silver-copper project with measured and indicated resources of 2.16 million ounces of gold, 13.17 million ounces of silver, and nearly 502.7 million pounds of copper. Fortuna Silver Mines Inc. (FSM) acquired Goldrock Mines and its Lindero gold project in Argentina. The project contains 1.15 million ounces of gold.

Gold Miners Optimizing Portfolio

The drop in gold prices in recent years had put the gold mining companies' bottom-lines under pressure. The companies were actively pursuing opportunities to optimize their portfolio, including the divestiture of certain non-core or non-productive assets and reduction of debt, maximization of return on capital along with driving value across the portfolio.

Newmont Mining Corp. (NEM) sold Newmont Waihi Gold Limited in New Zealand to OceanaGold Corp. (OCANF). In the last two years, Newmont has generated $1.7 billion through non-core asset sales, allowing the company to reduce its debt, invest in profitable production and return capital to its shareholders.

IAMGOLD Corp. (IAG) completed the sale of its Niobec mine to a group of companies led by Magris Resources Inc. for cash proceeds of $500 million. This sale will increase IAMGOLD's liquidity position, consequently strengthening its financial position over many of its competitors. Goldcorp had sold its 26% stake in Tahoe Resources for just under $1 billion in order to focus on cash flow generation.

Barrick Gold Corp. (ABX) is also shedding non-core assets to optimize portfolio and strengthen balance sheet. The company, in late 2015, completed the sale of a 50% interest in the Zaldivar copper mine in Chile to Antofagasta Plc. It also closed the divestment of its 70% interest in the Spring Valley project and its 100% interest in the Ruby Hill mine to subsidiaries of Waterton Precious Metals Fund II Cayman, LP.

Moreover, the company wrapped up the sale of its 50% interest in the Round Mountain mine and divested the Bald Mountain mine in Nevada to Kinross Gold Corporation (KGC) in 2016, receiving $610 million in cash for these non-core assets. Barrick reduced its total debt by 24% in 2015, exceeding its original debt-reduction goal of $3 billion.

The company has completed more than $1.4 billion in debt repayments so far in 2016, representing over 70% of its debt reduction goal for the year. The company now has less than $200 million in debt due before 2019, and roughly $5 billion of its outstanding debt of $8.5 billion will not mature until after 2032.

Gold's Safe Haven Appea

Gold has always been viewed as a store of value and a safe-haven asset. The buying of gold is a hedge against inflation, macroeconomic, geopolitical, systemic and monetary risk. This trend intensifies during periods of economic turmoil and geopolitical tensions. The current economic scenario is rife with all these factors.

Superiority Over Other Precious Metals

Gold's worldwide acceptance as a store of value sets it apart from other precious metals such as platinum, palladium and silver whose demand stems mainly from their industrial applications. Gold is produced primarily for accumulation while the other commodities are produced for consumption.

Moreover, in contrast to other commodities, gold does not perish, tarnish or corrode, nor does it have quality grades. There has not been any material change in gold's quality over the years; gold mined thousands of years ago is the same as today. Gold existing above ground is easily interchanged with newly mined gold. This ensures the continuous demand of the metal for years to come.

Some Good Picks from the Industry

With positive estimate revisions, positive record of earnings surprises in the recent quarters, and projected robust earnings growth, IAMGOLDcan be a solid addition to one's portfolio. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Harmony Gold Mining Company Ltd. (HMY) carries a Zacks Rank #2 (Buy) and its estimates for fiscal 2017 have moved up around 10% over the last 7 days. Further, for fiscal 2018 it has gone up 46%. The stock has an expected earnings growth of 253.33% for fiscal 2017.

AngloGold Ashanti Limited (AU), also carries a Zacks Rank #2 and has a projected earnings growth of 234% for 2016 and 47.90% for 2017. Pretium Resources Inc. (PVG), another Zacks Rank #2 stock has an average positive earnings surprise of 14.58% in the last four quarters.

Check out our latest Gold mining outlook for more on the current state of affairs in this market from an earnings perspective, and how the trend is shaping up for this sector going forward.

Zacks' Top Investment Ideas for Long-Term Profit

How would you like to see our best recommendations to help you find today's most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Tahoe Resources, Inc. (TAHO): Free Stock Analysis Report

Seabridge Gold, Inc. (SA): Free Stock Analysis Report

Pretium Resources, Inc. (PVG): Free Stock Analysis Report

Newmont Mining Corporation (NEM): Free Stock Analysis Report

Kinross Gold Corporation (KGC): Free Stock Analysis Report

Iamgold Corporation (IAG): Free Stock Analysis Report

Harmony Gold Mining Company Limited (HMY): Free Stock Analysis Report

Goldcorp Inc. (GG): Free Stock Analysis Report

Fortuna Silver Mines Inc. (FSM): Free Stock Analysis Report

AngloGold Ashanti Limited (AU): Free Stock Analysis Report

Barrick Gold Corporation (ABX): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

KGC NEM SA PVG

Other Topics

Stocks

Latest Markets Videos

Zacks

Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

Learn More