By Andrew Bary

Gold is rocking again, as it did in the 1970s when the metal was the decade's hottest investment. The same can't be said for gold mining stocks, but they deserve a closer look.

A lot has been going right for gold recently. Profligate U.S. fiscal policies have led to intractable $2 trillion annual deficits, while strong demand from central banks in the developing world has helped push the precious metal to a new high. Gold traded Friday at $2,750 -- and has risen 33% this year, its best annual gain since 1979. It has also left the S&P 500, which has returned 22%, in its dust.

Gold miners should outperform in a gold bull market due to operating leverage -- profits ought to rise rapidly as the price of the commodity increases more than costs. That hasn't been the case. The $15 billion VanEck Gold Miners, the top mining exchange-traded fund, has slightly underperformed the metal with a 30% gain. This continues a disappointing showing for the Gold Miners ETF which is still below its 2020 peak. It has been even worse for two industry leaders, Barrick Gold and Newmont, which have risen around 10% this year and are more than 30% below their record highs.

But the backdrop for the miners looks favorable, especially with gold potentially headed for $3,000 an ounce. Gold, for starters, is an underowned asset, even after ETFs like the $80 billion SPDR Gold Trust had their first quarterly net inflows since 2022 in the third quarter. The combined market value of leading miners is under $200 billion. That includes two well-run Canadian miners, Agnico Eagle Mines, which is the No. 3 global gold producer, and the higher-growth Alamos Gold; as well as two "streaming" companies, Franco-Nevada and Wheaton Precious Metal, which contract to buy gold and other metals over multiyear periods from producers but don't actually mine it.

The miners also offer growth, some leverage to gold prices, and regular dividends, unlike the metal, which yields nothing. They can also be had at an attractive valuation, with depressed Newmont and Barrick trading for about 11 times projected 2025 earnings. "The equities are not pricing in current gold prices," says Imaru Casanova, a portfolio manager at VanEck, which also runs the VanEck International Investors Gold fund. "They look relatively cheap."

The industry does have some proving to do. Barrick, which is second to Newmont with about four million ounces of annual gold production, has been bedeviled by cost, production, and political issues. At around $20, the stock is where it stood in 2016 when gold was half its current price. The company's pluses include a productive portfolio of mines led by a 60%-plus interest in a huge Nevada mine that it shares with Newmont. It has a balance sheet with virtually no net debt and plans to ramp up its copper production in coming years.

Africa is a chief investor concern, particularly a large mine in Mali where the increasingly anti-Western government is tangling with Barrick. CEO Mark Bristow, a South African with decades of experience operating in the sometimes dicey developing world, may just have the ability to handle it.

Newmont, the top global producer at about six million ounces annually, has seen its stock fall more than 20% since the company signaled higher costs and lower gold production heading into 2025 in its recent third-quarter profit report. "The market is frustrated that costs are eating into the margins at Newmont," says Michael Dudas, an analyst at Vertical Research Partners. "But the correction in the stock is overdone." He's bullish on Newmont, the only gold stock in the S&P 500 index, and has a $60 price target.

Agnico Eagle is the class act of the industry, with 3.5 million ounces of annual production. It has a reputation for hitting production and cost targets, with operations primarily in politically safe Canada. "It has traded at a premium to the sector for 20 years for a good reason," says Casanova.

The stock, at around $85, trades for about 22 times projected 2024 earnings, a 50% premium to Newmont and Barrick. CEO Ammar Al-Joundi emphasized costs, which are a few hundred dollars an ounce less than peers, and a commitment to grow value per share, on the company's earnings conference call this past week. After the event, newsletter writer and gold bug Fred Hickey called Agnico "a shining example of how a gold mining company should be run."

VanEck's Casanova is partial to Alamos, a midtier miner with about half a million ounces of annual production. "It's executing against plan, and has an excellent growth profile," Casanova says.

The two streaming companies, Franco-Nevada and Wheaton, trade at a premium to the miners because they're insulated from mining cost pressures as financial entities that provide capital to miners in return for future production.

Franco-Nevada, which has returned an impressive 15% annually since its 2007 initial public offering, gets about 75% of annual production from precious metals and the rest mostly from energy. There is some risk in the business, highlighted by a $1 billion write-down taken by Franco-Nevada last year when Panama closed a giant copper mine that interrupted the company's streaming output.

The higher-growth Wheaton, which gets nearly all its streaming revenue from gold and silver, aims to boost its production to more than 800,000 gold equivalent ounces -- with other metals converted to an equivalent amount of gold -- by the end of the decade, up from about 600,000 this year. Rick Levin, a private investor, says the company is well managed. "It's the J.P. Morgan of mine finance," he says.

"The lack of available Western funding for mine development over the past decade has allowed Wheaton to negotiate tremendous streaming deals that allowed it to lock in low prices and other favorable terms," Levin adds.

Given the risk of individual miners, investors may want to choose a mutual fund or ETF. The four top stocks in the VanEck Miners ETF -- with a combined 35% of its assets -- are Newmont, Agnico Eagle, Barrick, and Wheaton.

Write to Andrew Bary at andrew.bary@barrons.com

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November 01, 2024 13:07 ET (17:07 GMT)

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