3 UNDERVALUED Gold Miners to Buy on Dips

It’s been an outstanding start to the year for the Gold Miners Index (GDX), and the ETF is now the 5th best performing sector year-to-date.

While there was previously some anxiety about owning the miners given that we saw stunted production numbers related to government-mandated shutdowns, the gold price (GLD) has risen nearly 15% in the same period, more than offsetting any lost production. In fact, it’s even more…

bullish that this gold didn’t get sold in the quarter as it can now be sold 15% higher a quarter later. However, the Gold Miners Index remains a little overbought short-term as does gold, and this is why it’s imperative to hunt down the names that are still relatively undervalued vs. those that are now closer to fair value.

This article will discuss a few miners to put on one’s shopping list if we see a correction in Q3.

As I’ve noted in previous updates, the three main things I look for when it comes to which miners I want to own are relative valuation, margins, and earnings growth. In the case of Alamos Gold (AGI), Kirkland Lake Gold (KL), and AngloGold Ashanti (AU), all three meet these criteria, even if they all have very different production profiles. Let’s take a closer look at the three companies below:

(Source: YCharts.com, Author’s Chart)

Beginning with Kirkland Lake Gold, the company has had the best earnings trend in the sector for years and managed to grow annual EPS by 2400% from $0.08 in FY-2015 to $2.70 in FY-2019. If we look ahead to FY-2020 estimates, earnings are expected to grow by 24% to $3.35, a material deceleration from prior quarters.

However, the company is coming up against two headwinds this year, with one being a higher share count related to an acquisition that closed in January. The other is a temporary shutdown at two of the company’s Canadian operations.

Therefore, the fact that the company is expected to grow annual EPS 24% year-over-year after lapping a year of triple-digit-growth and despite headwinds is quite impressive.

It’s the valuation here that is the most compelling with KL trading at less than 14x FY-2021 annual EPS estimates of $3.78 at $50.00 per share. This is one of the lowest forward P/E multiples in the sector currently, and the disconnect makes little sense given that Kirkland Lake Gold is one of the largest producers operating out of the top-ranked jurisdictions (Ontario, Quebec, and Australia). Therefore, while the stock has had a nice run the past few weeks, I believe any weakness will be a buying opportunity. Ultimately, I continue to maintain my price target of $62.00 within the next 12 months.

(Source: YCharts.com, Author’s Chart)

 

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