Gold miners and broader equities
Gold miners (GDX) on the whole are looking inexpensive compared to the broader markets. The average ratio of the NYSE Arca Gold Miners Index to the S&P 500 Index (SPY) is 0.20 compared to the ten-year average of 0.68.
Gold equities’ valuations haven’t kept the pace with broader equities over the last few years. In this article, we’ll look at individual gold miners’ valuations and compare them to their histories and their peers.
Barrick has the highest valuation multiple
Among the senior mining companies under review (GDX), Barrick Gold (GOLD) is currently trading at the highest forward EV-to-EBITDA (enterprise value-to-EBITDA) multiple of 8.1x, implying premiums of 24.0% to its five-year trailing multiple and 15% to its peer average.
Barrick’s multiple has rerated 46% since its announcement of its merger with Randgold Resources on September 24, 2018. This rerating has likely resulted from the anticipation of synergies, cost savings, and increased returns.
For upside from here, GOLD will need to show more execution on its projects and resolve its disputes successfully.
Newmont Mining (NEM) is closely following Barrick with a multiple of 8.0x, implying a discount of 1.5% to its historical multiple and a premium of 14.5% to its peers. 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.
The combined Newmont-Goldcorp (GG) could command a premium due to its synergies. However, much of the outcome will depend on its post-merger project execution.
Goldcorp’s valuation catalysts
Goldcorp’s current multiple of 7.0x represents a discount of 18.6% to its historical multiple. Its valuation multiple has expanded by 14% since its merger announcement with Newmont on January 14. The rest of the upside in the combined entity’s multiple lies in its execution and cost synergies.
Kinross Gold (KGC) has the lowest forward multiple of 5.0x, which implies a discount of 29.0% to the peer average. While its valuation discount started to fall after it addressed its production growth concerns, geopolitical concerns have been weighing on the stock and its multiple in 2018 and 2019. If the recent Tasiast Phase Two expansion issue isn’t resolved as soon as possible, the company could see further downside.
Read Which Gold Mining Stocks Could Have Upside Potential in 2019? for more on gold miners’ latest earnings and potential outlooks.