Gold continues to trade above $2,000 an ounce even as gold mining stocks have been relatively depressed. There are strong reasons to believe that precious metals can rally by 15% to 20% during the year. If this holds, I expect a big rally in undervalued gold mining stocks. Let’s first talk about the catalysts for gold trending higher.
Economist David Rosenburg believes there is an 85% probability of a recession in the United States within the next 12 months. Of course, other economists believe that the U.S. can evade a recession. However, there is no doubt that economic growth is sluggish. It remains to be seen if we are headed for a soft or hard landing. In both scenarios, multiple rate cuts are highly likely in the next few quarters. This will be bullish for gold and other precious metals.
It’s also worth noting that central banks have continued aggressively accumulating gold through 2023. The reasons include reserves diversification and protection of reserves from inflation. Further, global geopolitical tensions remain high, another key reason for bullish on gold.
Newmont (NEM)
Newmont (NYSE:NEM) stock has looked weak and has corrected by almost 25% year-to-date. However, the blue-chip stock is attractive at a forward price-earnings ratio of 15.6 and offers a dividend yield of 3.35%. I expect a big reversal rally in NEM stock if gold trends are higher.
It’s worth noting that Newmont recently announced the sale of six non-core assets. Further, the company has cut dividends to pursue a balanced capital allocation strategy. This might not have been good news, but I believe there is ample scope for long term value creation.
Newmont has 128 million ounces in gold reserves and 155 million ounces in resources. Even with stable gold production, there is clear visibility for healthy free cash flows. Last year, Newmont reported operating cash flow of $2.7 billion. Assuming a 15% upside in gold and higher production on the back of the acquisition of Newcrest, I believe that OCF for 2024 will be in the range of $4 to $4.5 billion.
Kinross Gold (KGC)
Kinross Gold (NYSE:KGC) is attractive among the relatively smaller gold mining stocks. KGC stock trades at a forward price-earnings ratio of 13.7 and offers a dividend yield of 2.47%. With an investment-grade balance sheet, the company seems poised for organic and potential acquisition-driven growth.
Kinross reported a liquidity buffer of $1.9 billion as of December 2023 to put things into perspective. Further, the company reported operating cash flow of $1.6 billion last year. If gold surges higher, OCF will likely be more than $2 billion for 2024.
Therefore, there is high flexibility for robust dividend growth and capital investments. On the flip-side, Kinross has guided for stable gold production through 2026. The incremental revenue and cash flow will be on the back of a higher realized gold price. The company’s liquidity buffer is robust, and I expect acquisitions to boost the production outlook.
Barrick Gold (GOLD)
Barrick Gold (NYSE:GOLD) is another quality gold miner worth considering. GOLD stock has remained largely sideways in the last 12 months, and a breakout on the upside seems imminent. The stock looks undervalued at a forward price-earnings ratio of 15.2 and offers a dividend yield of 2.76%.
For 2023, Barrick Gold reported revenue and EBITDA of $11.4 billion and $5.5 billion, respectively. Further, the operating cash flow for the year was $3.7 billion. Financials have been robust, and Barrick has high flexibility for dividends, buyback, and increased exploration expenditure.
It’s worth noting that the company reported reserves depletion replacement of 109% for gold and 124% for copper. Healthy reserve replacement will likely ensure long-term production visibility and cash flows. I must add that Barrick Gold has guided steady growth in production through 2030. With higher realized gold prices, there is a strong case for healthy operating and free cash flow upside.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
