However, Q4 has been much better thus far for precious metals bulls, with the bulls staging a 14% rally thus far in the GDX, reversing nearly all the losses from Q3 when the gold price slid below $1,700/oz.
While the miners are up more than 10% off their recent lows, it’s worth noting that the sector remains the cheapest that it’s been in several years, and this suggests that further weakness should present a low risk buying opportunity. In this update, we’ll look at three miners trading at deep discounts to fair value, and their ideal buy points for the best reward/risk proposition:
With inflation readings continuing to remain elevated and negative real rates deeply in negative territory, one sector that doesn’t receive nearly enough love is the Gold Miners Index.
For those unfamiliar, the ETF is full of gold producers, silver producers, and royalty/streaming companies exposed to the gold and silver price. This disgust towards the sector is especially surprising given that the GDX is trading at its 2nd cheapest level in the past decade.
However, as the market goes, most investors and traders are interested in what’s hot now, not what’s offering the best value and may come back in favor next year.
The favored way to play the gold price to hedge against inflation is the Gold Miners Index, given that it’s quite liquid and a basket of stocks that provide exposure to gold.
However, with the average gold producer paying a dividend and the performance of the GDX often bogged down by the 10-15 poorly-run companies with razor-thin margins and inferior management teams, I believe the best way to play the gold price is through individual companies.
Typically, one must pay up for the best companies, which makes playing the industry leaders a less attractive proposition, given that the best way to lose money in the sector is by overpaying for quality.
However, after a 15-month cyclical bear market in the GDX, even some of the better names are dirt-cheap, which provides investors with an opportunity. Among the GDX, three names that stick out as high-quality business models at very reasonable valuations are Alamos Gold (AGI – Get Rating), Nomad Royalty (NSR), and Barrick Gold (GOLD – Get Rating).
I believe these three are worth keeping a close eye on, given that they trade at a discount to net asset value currently. Let’s look at Barrick first:
(Source: Company Filings, Author’s Chart)
As shown in the chart above, Barrick had a tough Q2 and Q3, with a mechanical mill failure at its Goldstrike Mine in Nevada weighing on production capacity.
This led to a sharp decline in production from this major production hub, which is 61.5% owned by Barrick and minority-owned by Newmont (NEM). This wasn’t helped by travel restrictions that weighed on productivity at its Hemlo Mine in Canada and much lower production from its Tongon Mine in Africa. However, repairs are complete at Goldstrike, which has Nevada up for a strong Q4.
Besides, Barrick continues to benefit from higher copper prices, which were able to…
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