While gold has enjoyed a significant rally in 2016 gaining roughly 24 percent on a year to date basis, a number of key small cap gold miners have by far outperformed the precious metal. A cursory glance at the VanEck Vector Gold Miners ETF (GDX) reveals that the index is up by more than 80 percent over the past year and it appears that there is still more upside to be expected.
Historically, gold has performed well in times of uncertainty in the market with investors choosing to invest in the commodity due to its enduring value. A number of notable economists and distinguished investors have already warned of a major impending stock market correction and institutions such as the Royal Bank of Scotland are confirming this after witnessing what it describes as ‘stress alerts’ in the market similar to the 2008 crisis.
As long as this level of uncertainty remains in the market, we can be sure that gold prices are likely to see a better performance compared to prior years which should also boost the performance of gold miners in turn. Furthermore, the demand for gold from central banks has seen a substantial rise as the banks try to diversify their monetary reserves from their accumulated paper currencies to gold, further propping up the metal’s price.
The resilience of gold miners has been uncanny even after the Fed’s hawkish comments as 17 of 22 publicly traded gold miners with a market cap of $300 million or greater surged by at least 100 percent by last month. In spite of these huge gains, we believe that there are plenty of unexplored opportunities in the space as valuations of most small cap miners appear cheap.
Richmont Mines (NYSE: RIC) is based in Canada and engages in the mining, exploration, and development of mining properties in the region. The company operates three gold mines including Camflo Mill in Quebec, the Island Goldmine in Ontario and the Beafour mine. As of December last year, the company’s proven and probable reserves stood at 68,350 ounces of gold at the Beafour mine and 561,700 ounces of gold at the Island gold mine.
Among the notable highlights of Richmont’s 1H16 was that the miner benefited from tailwinds brought about by increasing gold prices which saw it post revenues of $93.25 million or a 20 percent increase compared to the year ago period. Even as the company sold less ounces of the precious metal, a $25 increase in the average realized gold price per ounce proved to be enough to cushion it from the decrease in volumes.
The company is currently cash flow positive and reported earnings of $0.04 per share in 2Q16 while the debt/equity ratio is just 0.06 which compares nicely to the industrial average of 0.4
Shares of Richmont have surged more than 230 percent over the past one year and currently trade at $10 which could appear moderately expensive for some investors. The bottom line is that the fundamentals of the company are pretty solid and investors who are still on the sidelines should wait too long for a pull back to start seriously considering this stock.
IAMGOLD Corp (NYSE: IAG) has mining interests in Africa, Canada and South America where it explores for gold and silver. In addition to these mining properties, it also has two other joint venture mining projects. We would like to point out that IAMGOLD should be viewed as a long term investment rather than a quick trade based on a couple of things.
First, the company is not profitable though it’s expected to attain profitability sometime in 2017 which when coupled with the recently concluded $150 million stock issue has resulted in a bit of downward pressure on the stock price. However, this shouldn’t be a cause for worry among investors as the underlying fundamentals of the company are still intact.
As a matter of fact, a number of hedge funds have modified their holdings in IAMGOLD’s stock with Acadian Asset Management adding their stake by $7.13 million during the second quarter and AMP Capital Investors Ltd increasing its stake by 52.1 percent in the first quarter to cumulatively own 533,975 shares valued at $1.18 million.
Also, a number of analysts have been warming up to the company’s stock with Credit Suisse initiating coverage with a ‘neutral rating’ with a price target of $5.25 and RBC Capital reiterating its ‘sector perform’ rating with a price target of $6.5. This would imply that the share currently have an upside of at least 11.5 percent in the near term which when coupled with the bullish gold prices should drive value higher.
Kinross Gold (NYSE: KGC) is another Canadian gold miner with mines in Mauritania, Ghana, United States, Chile and Russia. The company’s share price declined by about 9 percent over the past three months after reporting earnings of $-0.01 per share in its last quarter missing analysts’ estimates of $0.01 per share. However,
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shares of the company are up by more than 140 percent on a year to date basis which means that the recent pullback could indicate a great entry point for investors looking to make a gold play.
Kinross looks quite appealing from several fronts with the first being that it appears to be significantly cheaper compared to its peers based on future cash flow. By taking various analysts’ estimates of the company’s future cash flow per share and dividing it with the current share price one can be able to calculate its price to future cash flow per share (CFPS).
The CFPS metric is important especially for gold miners due to the fact that most of them are usually highly leveraged which means strong positive cash flow will enable them to service their debts while maintaining or expanding their operations. Kinross is actually one of the cheapest gold miners going by this metric and with analysts expecting average earnings to come in at about $0.05 with a low end of $0.02, this stock holds plenty of potential.
In addition, major developments in its Tasiast mine in Mauritania will see production increase by about 87 percent and a reduction of all-in sustaining (AISC) costs by at least 45 percent by 2018.
McEwen Mining (NYSE: MUX) is perhaps one of the best performing gold and silver miners over the past year. Its mining assets consist of the San José Mine in Santa Cruz, Argentina, the El Gallo Mine and El Gallo Silver project in Sinaloa, Mexico, the Gold Bar project in Nevada, USA, and the Los Azules copper project in San Juan, Argentina.
The company’s shares have rallied by about 347 percent during the period driven by a great second quarter performance. The miner’s consolidated net income for the quarter came in at $8.4 million or $0.03 per share for compared to a net loss of $14.1 million or $0.05 per share in 2Q15.
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he improvement in earnings was as a result of the Minera Santa Cruz coupled with a lower AISC at the El Gallo mine compared to 2Q15.
McEwen attractiveness stems from the fact that the company has zero debt and has been steadily reigning in costs which will definitely play out great for investors as gold prices edge higher.