It’s been painful several months for investors in the Gold Miners (GDX – Get Rating) as they’ve watched nearly every major asset class soar while most gold producers have struggled even to tread water. This has undoubtedly put a severe dent in sentiment in the sector, but it’s also left many names trading at their most attractive looking valuations since the 2018 lows relative to the gold (GLD – Get Rating) price. In fact, some of the juggernauts in the sector are currently trading at less than 10x FY2021 estimated free cash flow and barely 12x earnings, with these valuations typically being reserved for dying businesses. Unless the gold is set to drop below $1,600/oz, this looks to be a buying opportunity, but the key is hunting down the best names in the sector. In this article, we’ll look at a few stand-out names that offer both long-term growth and valuations that bake in a significant margin of safety.
(Source: Author’s Chart)
Beginning with Alamos Gold (AGI – Get Rating), the company is a producer focused in Tier-1 and Tier-2 jurisdictions, with the majority of its products currently coming from Canada. The company’s two flagship mines are the Young-Davidson and Island Gold Mines in Northern Ontario, with the company’s third mine being Mulatos Mine in Mexico. Since 2016, the company has steadily grown production through acquisition and ramp-ups in operations, but this period of significant capital investment is finally complete. This has allowed the company to focus on optimizing current operations while it uses free cash flow to explore bringing its Lynn Lake Project in Manitoba online and ramping up its Island Gold Mine with a Phase III Expansion to over 235,000 ounces per year (135,000~ ounces currently). Assuming the company is successful in this goal, it could grow production by up to 80% in the next five years. In a sector where even single-digit production growth out to FY2025 is rare, this is quite impressive.
(Source: YCharts.com, Author’s Chart)
Despite Alamos’ solid organic growth profile, the company has dropped to a valuation of barely 11x FY2021 earnings estimates, trading at a share price of $8.30. This is a very attractive valuation for a company set to grow annual earnings per share [EPS] by nearly 100% next year ($0.76 vs. $0.41), and a company set to report $0.76 in annual EPS. In fact, if we subtract out the company’s net cash position of nearly $0.20, the company is trading at barely 10x FY2021 earnings. While this dirt-cheap valuation does not…
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