A good portfolio includes stocks from different industries and is also diversified across asset classes. For decades, gold stocks have been a hedge against inflation with the precious metal considered as a hard currency.
Since the onset of the crisis driven by the novel coronavirus, the Federal Reserve has used aggressive monetary policies to support the economy. As the Fed’s balance sheet swells, it’s an indication of surging liquidity in the financial system.
It’s not surprising that gold has started to trend sharply higher after years of sideways movement and consolidation. With the Fed committed to keep interest rates low for an extended period, I am bullish on gold.
From an investment perspective, gold stocks can be considered for capital gains and higher dividends in the coming years. There are quality gold stocks with strong fundamentals that have surged in fiscal year 2020.
I believe that the following gold stocks can be considered for the portfolio:
- Newmont Corporation (NYSE:NEM)
- Kinross Gold (NYSE:KGC)
- Kirkland Lake Gold (NYSE:KL)
- Yamana Gold (NYSE:AUY)
Gold Stocks to Count On: Newmont Corporation (NEM)
Among the big names in the gold mining industry, I like Newmont. With the rally in gold, NEM stock has moved higher by 56% in the last year. I believe there is potential for further upside in the coming quarters.
When it comes to benefiting from higher gold prices, Newmont is a cash flow machine. For the first quarter, the company reported $939 million in operating cash flow and $611 million in free cash flow. The company is therefore positioned to generate FCF in excess of $2.5 billion for the year. This will translate into higher dividends. For Q1 2020, the company announced a dividend of 25 cents per share, which was higher by 79% on a year-on-year basis.
From a balance sheet perspective, the company is well positioned with a total liquidity buffer of $6.6 billion. In addition, net-debt-to-adjusted-EBITDA ratio of 0.7 implies ample financial headroom for aggressive capital investments.
Newmont expects the all-in-sustaining-cost to decline to $800 to $900 per ounce by 2023. If gold remains firm, EBITDA margin is likely to expand and this will further increase cash flows.
Overall, NEM stock looks attractive for the coming years. With robust cash flows, shareholder value creation will come through dividends and share repurchase.
Kinross Gold (KGC)
KGC stock has also surged higher after March 2020 and I see more juice in the rally. From a fundamental perspective, I like Kinross Gold with the company’s net-debt-EBITDA ratio of just 0.9. This leaves ample room for leveraging to accelerate growth and benefit from higher gold price.
Another recent trigger for the stock is the Mauritania deal. RBC analyst Josh Wolfson believes that the “two-year dispute was the single greatest identifiable uncertainty for the company.” The Tasiast mine does have a strong free cash flow forecast for the coming years.
It’s also worth noting that the company has an all-in-sustaining-cost of $993 an ounce. With gold trading at $1,800 an ounce, cash flows are likely to be robust. As a matter of fact, Kinross Gold reported an increase of 81% in operating cash flows for the first quarter on a year-on-year basis.
I must mention here that KGC stock does not pay a dividend. However, if gold price remains firm, I expect dividends in the coming quarters. That can potentially result in stock re-rating.
Kirkland Lake Gold (KL)
In the last few years, Kirkland Lake Gold has been on a high-growth trajectory. The company’s gold production has increased from 151.2 million ounces in 2016 to 619.4 million in the last financial year. With the acquisition of Detour Gold this year, the company’s growth momentum is likely to sustain.
Even with robust growth, the company has a zero-debt balance sheet. This provides ample headroom to continue with aggressive growth. In addition to KL stock trending higher, the company’s dividend has been increasing steadily. That’s another reason to considering investment in the stock.
Coming back to the impact of the acquisition of Detour Gold, the company has reported production of 660,634 ounces for the first half of 2020. That’s 48% higher than the production reported in the first half of the last fiscal year. Therefore, strong production growth will continue at a time when the company stands to benefit from higher gold prices.
Overall, Kirkland Lake Gold has strong cash flows and dividend growth visibility. These factors make KL stock worth considering for the medium to long-term.
Yamana Gold (AUY)
Among the relatively smaller names in the gold mining industry, AUY stock has been a performer. The stock has surged by 111% in the last one year. After the current consolidation, I expect more upside for AUY stock.
In terms of financial progress, the company reported operating cash flow of $129.4 million in the first quarter. For the same period last year, operating cash flow was $12.4 million. Clearly, the company has benefited from higher gold prices.
As free cash flow increases, I expect higher dividends as well. The company has already increased dividends three times in the last year.
Yamana Gold has higher leverage as compared to other stocks discussed. As of the first quarter, the company reported total debt of $786 million on a pro-forma basis. However, I expect the company to de-leverage as FCF increases. This is yet another positive trigger for the stock.
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 focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.