Since the outbreak of the novel coronavirus, central banks have stepped in to support economic growth. With expansionary monetary policies, the global financial system has a liquidity glut. This has translated into a strong rally for equities and other asset classes. In particular, precious metals stocks have been in focus.
Why? Expansionary monetary policies imply weakening of currencies. This supports upside in hard assets like gold and silver.
With the Federal Reserve committed to keeping interest rates near zero for an extended period, it makes sense to consider precious metals stocks.
This column will discuss three precious metals stocks that are worth considering for the medium to long term. I will dive deep into the following names:
Precious Metals Stocks: Kirkland Lake Gold (KL)
Among the relatively smaller names in the gold mining industry, KL stock is worth considering for long-term value creation. KL stock has been subdued in the current year and this is a good time to accumulate as gold remains strong at higher levels.
Specific to the company, there are several positive triggers. The company’s gold production continues to trend higher with a sustained decline in all-in sustaining costs. Importantly, the company’s free cash flow has increased from $113.9 million in fiscal 2016 to $463 million in fiscal 2019. As gold trends higher, further acceleration in FCF is likely.
It’s also worth noting that the company completed the acquisition of Detour Gold in January 2020. In the coming quarters, the full impact of the acquisition will be visible on the company’s production and cash flow growth. This is likely to trigger a positive stock reaction.
Kirkland Lake Gold is also attractive from the perspective of dividends. As gold prices remain firm, EBITDA and cash flow will also remain robust. This implies steady growth in dividends.
From a balance sheet perspective, the company reported cash of $530 million as of March 2020. With no debt, the company has ample financial headroom for accelerated growth in the coming years.
Pan American Silver (PAAS)
PAAS stock has been surging with gains of 150% in the last year. However, long-term investors can still consider exposure to the stock on any profit booking.
Pan American has mineral reserves of 557 million ounces of silver and 5.1 million ounces of gold. With a diversified and large asset base, coupled with robust margins, the company is attractive.
I also like Pan American because of the company’s balance sheet strength. As of March 2020, the company reported total debt of just $299.2 million and a cash position of $239.2 million.
With the company having generated $1.3 billion in free cash flow since fiscal 2010, there is ample scope for shareholder value creation. FCF is likely to accelerate in the coming years and the sentiment remains positive for precious metals.
PAAS stock currently has a dividend of 20 cents per share, which is likely to increase due to two factors. First, as precious metals trend higher, an FCF increase would imply higher dividends. Second, with a strong balance sheet, there is scope to gradually increase dividends.
Overall, PAAS stock is attractive even after the big rally in the last year. However, investors can wait for some correction for fresh exposure to the stock.
Precious Metals Stocks: Barrick Gold (GOLD)
For investors bullish on precious metals stocks, GOLD stock is also worth considering for the medium to long term. In the last year, GOLD stock has surged by 71%, but I believe that there is more juice in the rally.
The first reason to like Barrick Gold is the company’s potential for cash flow upside. For Q1 2020, Barrick Gold reported an all-in sustaining cost of $954 an ounce. With gold trading at $1,780 an ounce, I expect the company to report robust EBITDA margin and cash flows.
For Q1 2020, the company reported FCF of $438 million with realized gold price of $1,589 an ounce. Therefore, if gold trades around $1,800 an ounce, the company is well positioned to generate annual FCF of $2 billion. This would imply higher dividends and a decline in debt in the coming quarters.
Therefore, with globally diversified assets, debt reduction and strong cash flows, GOLD stock is worth holding in your portfolio.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.