Which Gold Miners Could Offer Valuation Upsides after Q3 2018?

Gold miners and broader equities

As we discussed in As Positive Catalysts for Gold Emerge, Which Miners May Benefit? gold miners are looking inexpensive compared to broader equities.

The average ratio of the NYSE Arca Gold Miners Index and the S&P 500 Index (SPY) is 0.20 compared to the ten-year average of 0.68.

Which Gold Miners Could Offer Valuation Upsides after Q3 2018?

While the valuations of broader equities have continued to increase, the valuations of gold stocks haven’t kept up, and the ratio has fallen. In this article, we’ll see how individual gold miners look based on their valuations and compared to their histories and their peers.

Newmont has the highest valuation multiple

Among the senior mining companies under review (GDX), Newmont Mining (NEM) is currently trading at the highest forward EV-to-EBITDA (enterprise value-to-EBITDA) multiple of 7.8x, implying a premium of 25.0% to the peer average.

At a time when growth is difficult to come by in the gold mining space, Newmont Mining has a strong project pipeline with very low execution risk. Also, most of its assets are in geographically attractive mining jurisdictions.

The company expects its costs to improve in 2019 and beyond as its low-cost supply comes online. This could set the stock’s multiple up for the next round of rerating.

Barrick Gold

Barrick Gold (ABX) has the second-highest multiple of 6.8x, which represents a premium of 4% to its historical multiple. Its multiple has rerated since the announcement of its merger with Randgold Resources (GOLD) to form an industry-leading gold company (GDX) with the greatest concentration of Tier 1 gold (GLD) assets.

As we discussed in Is the Barrick-Randgold Merger Enough of a Reason to Bet on ABX? Barrick’s costs will fall, and its production profile will improve on low-cost, high-quality assets after the merger. Its new position will also add to its geopolitical risk. For further upside, the company will need to show more execution on its projects and resolve its disputes successfully.

Goldcorp’s valuation catalysts

Goldcorp’s (GG) current multiple of 6.3x represents the maximum discount of 30% to its historical multiple among its senior peers. Its valuation multiple has contracted 24% since the start of the year, mainly due to disappointing results quarter after quarter.

While investors still like GG’s 20/20/20 growth plan, now they’re more focused on the company executing on its short-term production guidance. It’s also vital for the company to come in either at or lower than its all-in sustaining cost guidance in the fourth quarter to restore investors’ confidence in its management’s execution of these plans.

Kinross Gold (KGC) has the lowest forward multiple of 4.3x, which implies a discount of 38.0% to the peer average. Although its discount started to fall as it addressed its production growth concerns, geopolitical concerns have weighed on the stock and its multiple in 2018. If the recent Tasiast Expansion Phase Two issue isn’t resolved as soon as possible, the company could see further downside.