If we look at the average annual returns for different asset classes in the last 10 years, gold has been an underperformer as compared to U.S. equities. I strongly believe that gold will likely match the performance of equities or out-perform in the next few years.
The Federal Reserve recently announced that it will keep interest rates near-zero levels through fiscal year 2023. This is the key reason to be bullish on gold. Amid intermediate corrections, the hard currency is likely to trend higher as expansionary monetary policies continue and the dollar weakens.
It’s worth noting that the Fed expanded its balance sheet from $4.2 trillion in February 2020 to $7.0 trillion in September 2020. This is a clear indication of the aggressive expansionary policies likely to support gold.
Inflation is Coming
Recently, hedge fund manager Stanley Druckenmiller warned that inflation can potentially hit 10% in the coming years. I believe that even if inflation trends above 5%, gold is likely to go ballistic.
When Wood Mackenzie provided a bullish update on gold for the current year, the focus was on escalating geo-political tensions. I believe that this factor will continue to support the precious metal in the coming years.
Another demand trigger for gold is sustained purchase by central banks. To diversify currency holdings, central banks globally have been accumulating gold. Factors like geo-political tensions, currency risk and economic uncertainty will ensure that the demand for gold remains strong from central banks.
Overall, these factors will help gold stocks remain performers as EBITDA margins expand and cash flows swell.
This column will discuss three gold stocks that are worth holding not just in the medium-term, but also for the coming decade.
Let’s discuss the following names:
3 Gold Stocks for Any Market Conditions: Newmont Corporation (NEM)
NEM stock has been moving higher, in-sync with upside in gold prices. In the last six months, the stock has returned 55.6%. I believe that NEM stock is among the best gold stocks for several reasons.
First, as of second quarter of 2020, the company reported total liquidity of $6.7 billion with net-debt-to-adjusted-EBITDA of 0.6. With low leverage, the company has a strong balance sheet, which positions the miner for organic and inorganic growth.
Second, the company expects its all-in-sustaining-cost to decline to $800 to $900 an ounce by FY2023. With gold likely to trend higher, the impact will be seen in the form of expanding EBITDA margin. Further, free cash flows are likely to swell in the coming years.
Third, the company currently has an annualized dividend of $1.00 per share. I expect dividends to increase and this makes NEM an attractive income stock. It’s worth noting that the company has 95.7 million ounces of gold reserves with a reserve life of more than 10 years. Therefore, the company is well positioned to sustain production and take advantage of higher gold prices.
Overall, Newmont Mining has a diversified asset base coupled with ample financial flexibility. With a track record of generating healthy cash flows, the stock is worth holding for the long-term.
Kirkland Lake Gold (KL)
Kirkland Lake Gold is another high-quality name among gold stocks that’s worth considering for the next five years. While Newmont Mining is likely to have stable production in the coming years, Kirkland is on a high-growth trajectory. This makes KL stock attractive even after a 115% upside in the last six months.
From a growth perspective, Kirkland Lake Gold acquired Detour Gold in January 2020. The impact of the acquisition will be seen in the form of production and cash flow growth in the coming quarters. As free cash flow swells, the company’s dividend pay-out is also likely to increase.
I am also positive on the company’s alliance with Newmont Canada for exploration opportunities around Holt Complex and Newmont’s Timmins Properties. The partnership with a mining major is likely to help Kirkland push for further growth.
From a financial perspective, the reason to like Kirkland is that the company is debt-free. With $537 million of cash coupled with growing cash flows, the company is well positioned for aggressive growth and shareholder value creation.
Therefore, even after the big rally in the last six months, I would look to accumulate KL stock on dips. As sentiments remain bullish for gold, the stock is a potential portfolio catalyst.
Barrick Gold Corporation (GOLD)
GOLD stock surged last month with Warren Buffett buying stake in the gold mining major. The legendary investor has never been known to be a gold bug. However, the stake in GOLD stock is an indication of the Oracle of Omaha’s inflation expectations in the coming years.
Further, Warren Buffett likes companies that can deliver robust cash flows on a sustained basis. This is very likely for Barrick Gold in the coming years as EBITDA margin expands and dividends swell.
For Q2 2020, the company reported an all-in sustaining cost (AISC) of $1,130. Even if the AISC remains above $1,000, the company is well positioned to deliver healthy EBITDA margins with gold trading near $1,900 an ounce. As an example, the FCF for the second quarter was $522 million, which implies an annualized FCF of $2.0 billion. This gives Barrick Gold ample headroom to increase dividends, de-leverage and grow aggressively.
Barrick Gold has also been divesting assets to focus on “Tier One” assets. I believe that this will help in reduction in AISC in the coming years. Therefore, EBITDA margin is likely to expand from current levels.
Overall, GOLD stock has been a performer with robust returns of 82% in the last six months. Any correction would be a good opportunity to accumulate this potential multi-bagger.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
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.