Those of you who read my previous article on the surmise that easy-to-access, no-commission platforms like robinhood.com (See: Robinhood.Com – A Potential Game Changer For Gold And Silver Investment) will be aware that I consider the potential impact of this new money hitting the stock market could easily be hugely supportive of precious metals ETF and stock prices moving forward. These stocks and ETFs are extremely low volume in activity in comparison with the major mainstream equities so even the small amounts invested by new investors accessing the markets for the first time could be very significant indeed as price drivers.
Take the most popular robinhood stock – Ford (NYSE:F) – according to robintrack.net, there are over 930,000 robinhood users invested in the stock. Investment banking and asset management firm JMP Securities (NYSE:JMP) has estimated the average account size for a typical Robinhood account ranges from $1,000 to $5,000, if we take a median figure of $3,000. And let’s assume the average robinhood investor holds $300 worth of 10 different stocks, the robinhood investment alone in Ford could total as much as around $280 million. And robinhood.com is not the only easy-to-use, commission-free brokerage platform out there, attracting new investment customers, but perhaps the highest profile one.
What has been becoming apparent is that the robinhood investment community seems to have begun to lose faith in the recovery and bankruptcy stocks, particularly given the realization that there will be no short-term, V-shaped recovery in the U.S. economy. Indeed on the latest GDP figures, the U.S. is in the deepest recession since the Great Depression, and it could be getting worse, pushing any recovery in the worst-affected companies ever further into the future. Indeed some may not survive. The result is that if one looks at the graphics of the number of robinhood.com holders in these stocks, the curve is turning downwards. Further, the realization may be dawning that only those stocks seeing benefit from the coronavirus hit on the economy will be worth investing in, and these include some of the big tech stocks like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) etc. – hence the strong performance of the NASDAQ – as all reported better-than-anticipated Q2 earnings.
Of course the other sector which is benefiting – and hugely so – are the precious metals related counters. Unlike general equities which have lost ground this year, precious metals prices – particularly gold and silver – have risen strongly. Gold, for example, is up almost 30% year to date and silver a shade more after a pretty disastrous March and April (It has almost doubled in price since its nadir in mid-March). Both look poised to move higher still as the year progresses and this has given a huge boost to the big precious metals ETFs – GLD, IAU and SLV. All these are seeing record metal inflows at present.
But poised to do better still are the precious metal mining stocks which are beginning to report very strong Q2 earnings. And remember that the average Q2 gold price, on which the latest earnings figures are based, was only around $1,711. The current gold price is around $250 higher or more. Given that most of the big precious metals miners are profitable at around a gold price of $1,000 an ounce, just imagine the kind of gains they will be achieving at current prices. If the price holds up – and the consensus is that it has further to rise yet – then Q3 earnings for many of these will be through the roof. You ain’t seen nothing yet!
If you are a risk taker, then some of the midsize miners and juniors may be where to invest your money, but we always recommend the safer options of the mining majors like Barrick (NYSE:GOLD), Newmont Goldcorp (NYSE:NEM), Kinross (NYSE:KGC), Agnico Eagle (NYSE:AEM), Yamana (NYSE:AUY), etc., all of which have a geographical spread of prime operations thus mitigating technical and political risk factors. The non-North American majors like Anglogold Ashanti (NYSE:AU) and Newcrest (OTCPK:NCMGY) are probably worth considering too as are Russia’s Polyus Gold (OTCPK:OPYGY) and Polymetal (OTCPK:AUCOY) both of which are available on the OTC market, and not particularly prone to political risk, but may not appeal to the U.S. investor because of their domicile.
Among the mid-tier and junior miners, Kirkland Lake (NYSE:KL), Eldorado Gold (NYSE:EGO), Pretium (NYSE:PVG), B2 Gold (NYSEMKT:BTG) etc. are all worth looking at, among others – the latter is already particularly popular on robinhood.com so obviously has a strong U.S. following. Centerra Gold (OTCPK:CAGDF) has not yet registered on the Robinhood community, but is also available on the OTC market and has just reported a big Q2 earnings rise and a 25% dividend increase. However, the likely safest way into these smaller stocks is via the two somewhat similar Van Eck precious metals mining ETFs – GDX and GDXJ. The latter supposedly covers precious metals mining juniors, but actually its biggest investments are in major and mid-tier miners as are those of the GDX big brother.
The real risk averse mining investors have tended to look at royalty and streaming stocks as cutting their risk exposure as they tend to lack the technical element inherent in mining activity. In general some of the bigger royalty companies like Franco Nevada (NYSE:FNV) and Royal Gold (NASDAQ:RGLD) have not been picked up in volume by robinhooders, although the more silver focused Wheaton Precious Metals (NYSE:WPM) and the smaller Sandstorm Gold (NYSE:SAND) do register reasonably high up in the robinhood league table. However, that is no reason to avoid FNV and RGLD which have tended to do well when metal prices and mining companies are performing well.
To give an indicator of the potential earnings rises ahead for the gold majors though, Newmont Goldcorp, Barrick Gold, Kinross Gold (KGC), Yamana and Agnico Eagle have already announced their preliminary Q2 earnings figures which are mostly very positive.
NEM had already taken the decision to up its dividend 79% to 25 cents a quarter and that increase remains in place, although there has to be the possibility (likelihood?) of a further dividend boost by the end of the year assuming gold continues to perform, which we think it will. Indeed if it maintains its current levels, there should be scope for another hefty dividend increase ahead. AUY and AEM are also dividend payers, but KGC is not for the time being, although we expect it will rectify this situation before too long – if only to catch up with its peers.
As a guide to the ongoing prospects/performance of all the mining majors we will look at the latest results and prospects for NEM and KGC, two of the biggest global gold producers with, between them, major operations in the Americas, Australia, Africa and Russia,
Newmont Goldcorp is the world’s biggest gold producer by volume having surpassed Barrick Gold, as the latter has divested some significant mining businesses that it considers non-core. Newmont has been on the divestment path too, although not quite to the extent of Barrick – but as a result both companies are much stronger financially.
NEM’s Q2 earnings have come in at $0.32/share compared with $0.12/share for the same quarter in 2019. While this represents a major increase, due primarily to the rise in gold and silver prices, it lagged behind consensus estimates – notably the silver price was depressed through much of the quarter and that will have put a big dent in the earnings of Penasquito in Mexico, one of the world’s largest primary silver mines. But even more of a problem for the company will have been the Covid-19-related temporary closures of several of its mines, notably the aforementioned Penasquito, along with Cerro Negro and Yanacocha. Musselwhite and Eleonore were also shut down temporarily during the quarter.
However, all the mines that were temporarily on care and maintenance in Q2 are now fully back on track, and with gold and silver prices much higher now, Q3 and beyond are looking particularly promising for a big further uptick in earnings. NEM’s stock price has risen by around 59% so far this year, and I would anticipate further substantial gains as Q3 progresses along, with higher gold and silver prices and much higher production with the temporarily closed mines back in action. Newmont has retained its guidance at attributable gold production of around 6 million ounces. All in sustaining costs (AISC) are predicted at $1,015 per ounce, but this would have been adversely affected by the lower production figure in Q2. Looking ahead to 2021, AISC could well come back below $1,000, assuming full production is maintained at all operations. Looking at the regional figures, these are mostly below the $1,000 mark anyway.
On expansion prospects, NEM is continuing with its Tanami Expansion 2 and Subika Underground as well as advancing laybacks at Boddington and Ahafo. This should see enhanced gold output in 2021. Things look set fair for some good gains moving forward, while the higher output should see AISC coming down as noted above. If gold hits $2,000 this year and stays there, considerably higher earnings prospects are on the cards, and this could lead to another dividend hike too. This stellar performance has been achieved despite the production difficulties that have beset the company in Q2 – now behind it. All in all, the prospects are looking good for NEM.
Kinross Gold, the No. 4 gold miner in the world, has also reported much enhanced Q2 earnings, and its stock price is already up a massive 96% so far this year. The gold price is up around 29% over the same period, and this demonstrates the huge leverage of a mining stock with all cylinders firing over the metal price. This should be apparent for any mining stock that can maintain or enhance gold output.
All Kinross’s operations were active during the quarter, but as with many miners, production fell due to virus-related safety mitigation measures. Production came to 571,978 attributable gold equivalent ounces with sales totaling 584,477 gold equivalent ounces. For H1, production was over 100,000 ounces lower than in 2019, and sales just under 100,000 ounces less, but the big increase in prices received meant that Q2 net earnings more than doubled year on year to an adjusted figure of 15 cents/share. Indeed KGC reported a sales margin of $987 per gold equivalent ounce on an average gold price received of $1,712 – gold is much higher now suggesting the Q3 margin will be substantially higher still.
The company’s three largest producing mines – Paracatu in Brazil, Kupol in Russia and Tasiast in Mauritania – delivered 63% of total production and were the lowest-cost mines in the portfolio, with an average cost of sales of $596 per gold equivalent ounce. AISC across all the company’s mines came in at $984 an ounce, and with the current gold price around double that figure, this further demonstrates KGC’s continuing earnings potential moving forward.
KGC did withdraw its annual guidance due to continuing uncertainty surrounding the likely ongoing effects of the COVID-19 pandemic virus, but does note that the ongoing costs of sales, AISC and capex are on track to meet its original guidance figures. To this we would add that the far higher gold and silver prices now being received are likely to more than compensate for any virus-related production cuts – as they did in Q2.
In his statement accompanying KGC’s Q2 earnings figures, CEO Paul Rollinson noted “Kinross had a strong second quarter, as we generated robust free cash flow, more than doubled earnings year over year, and continued to strengthen our investment grade balance sheet. Our margins increased 53% year over year, well above the 31% increase in the average realized gold price.”
What the NEM and KGC Q2 results show is the enormous impact on precious metals mining company earnings of the big increases seen of late in gold and silver prices. Given the vulnerable nature of the general equities markets amidst the U.S. and global recession, it’s almost certainly a no-brainer to invest in the precious metals miners, and as always, we recommend the bigger players because their diversity of operations tends to protect them from the technical and geopolitical risks of their smaller cousins with perhaps only one or two mining operations. The rewards may be potentially greater, but then so are the risks.
We have concentrated this coverage on two of the biggest precious metals miners to give an indication of the huge benefits accruing to the sector due to the big uptick in gold and silver prices and the effect on earnings, which should be further enhanced in Q3 and beyond. If one follows the fortunes of AUY and AEM mentioned above, you will see similar effects. Both reported strong Q2 earnings as well despite in the case of AEM a severe adverse impact on production resulting from virus-related mine shutdowns, but these were more than compensated for by the huge improvement in margins resulting from higher metal prices. For the record, AUY’s stock price is up 66% year to date, helped no doubt by its robinhood.com popularity, and AEM 31% despite its production difficulties.
The world’s No. 2 gold miner, Barrick Gold, is due to give its detailed Q2 report within the next fortnight. Barrick’s stock price is up 56% year to date and the company is a dividend payer which has already increased its dividend payment three times in 2019/20. It is retaining its annual guidance at between 4.6 and 5 million ounces per year. Barrick effectively engineered a reverse management takeover of Randgold Resources which came into effect at the beginning of last year confirming Randgold’s CEO and CFO as two key management players in the combined company. Randgold used to pay a far higher percentage dividend than Barrick, and there is speculation that CEO Mark Bristow would like to address this discrepancy for former Randgold shareholders by raising the Barrick dividend to compensate. The higher gold prices may just enable the company to do just that.
All the gold majors had come under fire for allowing management costs and debt to soar out of control. They have mostly worked hard to reduce debt by disposing of non-core assets and cutting management and admin costs too. The danger is, though, that the higher gold and silver prices and margins may allow them to revert to the bad old ways, and how managements handle this will be worth watching accordingly. For the moment, they are keeping costs and capital expenditure well under control, but for how long? These parameters need to be watched closely, but if they continue to be kept under control, the gold miners are due for a strong ride, while general equities remain vulnerable.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.