The Gold Miners Index (GDX) has suffered a sharp correction since its August highs as the price of gold (GLD) has reversed sharply lower after hitting a new all-time high above $2,050/oz. Fortunately, the $150/oz correction in the yellow metal has not damaged the fundamentals of these miners, as the average realized selling price across the sector in Q2 was $1,805/oz, 6% lower than where we’re sitting even after this correction. This means that even though the miners have fallen precipitously, their margins have actually improved, and their valuations have become even more compelling. This article takes a look at three miners that are trading at dirt-cheap valuations, especially considering their strong double-digit earnings growth rates expected in FY2021.
While Yamana Gold (AUY), Kirkland Lake Gold (KL), and Pretium Resources (PVG) have differing production profiles and little in common other being gold miners, they do share one common trait: explosive earnings growth. The three companies are expected to grow annual EPS at an average growth rate of 42% next year, based on preliminary and conservative FY2021 estimates. Meanwhile, the three companies are trading at a median forward P/E ratio of 15.94, a multiple that’s more synonymous with low growth companies with saturated growth. Therefore, I believe this correction in these names is an opportunity, especially as these companies get ready to report their best earnings on record in Q3. Let’s take a look at the three companies below:
Beginning with Kirkland Lake Gold (KL), the company recently completed the acquisition of Detour Gold, and has transformed itself into a 1.5 million-ounce gold producer, from a 900,000-ounce producer last year. The company is one of the only 1 million-ounce plus gold producers that operates out of strictly Tier-1 jurisdictions, meaning it’s one of the safest bets as it does not suffer from political risk or risks of terrorism, like some companies in Mali and Burkina Faso must endure. Meanwhile, it’s also the lowest-cost senior gold producer, with all-in sustaining costs expected to come in below $800/oz this year.
(Source: YCharts.com, Author’s Chart)
Despite these superior fundamentals, the company has slid 20% from its recent highs, which has left the stock at a very attractive forward P/E ratio of 14.30. If this were a low-growth company then the valuation would be more understandable, but Kirkland Lake pays a 1.0% dividend yield and is on track to grow annual earnings per share by 25% next year, a much higher earnings growth rate than the average S&P-500 company. Based on the company’s aggressive buyback program, it’s clear that management believes there’s a disconnect in the valuation as well, with the company buying back over 850,000 shares at C$64.64 to C$65.56 in the past month. This represents 0.35% of the share float, and should be a tailwind for earnings per share growth with the share count shrinking even further. Given the exceptional earnings growth here combined with…
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