Commodities & Metals

Despite 20% Gain, Some Still See Gold as Undervalued: 4 Stocks to Buy


It’s amazing that with markets essentially where they were this time last year, the two big stories so far in 2016 are the resurgence in crude oil and the renewed interest in gold. It probably should come as no surprise, given that some of the biggest and most prestigious Wall Street banks were very negative on both to start the year, and typically that is ultimate contrarian indicator.

In a new research note from Michael Hartnett, the superb chief investment strategist at Merrill Lynch, he notes, as he has for some time, that many investors are very bearish and nervous about a “summer of shocks.” Cash levels are high, and most managers that do own stock are buyers of the high-quality variety. He also says some contrarians see gold as still undervalued despite the outstanding 2016 surge higher.

We screened the Merrill Lynch research universe for gold stocks rated Buy and found four for our readers to consider.

Agnico Eagle Mines

This top stock has remained a long-time Wall Street favorite. Agnico Eagle Mines Ltd. (NYSE: AEM) is a senior Canadian gold mining company that has produced precious metals since 1957. Its eight mines are located in Canada, Finland and Mexico, with exploration and development activities in each of these regions, as well as in the United States and Sweden. The company and its shareholders have full exposure to gold prices due to its long-standing policy of no forward gold sales. Agnico Eagle has declared a cash dividend every year since 1983.

The company posted outstanding results at the end of April, with adjusted earnings per share more than double the Merrill Lynch estimate. Agnico Eagle also noted that it now expects 2016 production to be at the top end of guidance, and that could continue to bode well for earnings.

The company remains one of the top picks on Wall Street as it fits the objectives of having quality mining assets with attractive margins, and it sports a very solid balance sheet.

Agnico Eagle investors are paid a 0.7%% dividend. The Merrill Lynch price objective for the stock is $52, and the Thomson/First Call consensus target is $44.35. The share closed most recently at $48.31.


This is another top company with a solid balance sheet that makes sense for investors to consider. Goldcorp Inc. (NYSE: GG) engages in the acquisition, exploration, development and operation of precious metal properties in Canada, the United States, Mexico and Central and South America. It primarily explores for gold, silver, copper, lead and zinc deposits.

Goldcorp’s principal mining properties include the Red Lake, Éléonore, Porcupine and Musselwhite gold mines in Canada; the Peñasquito and Los Filos mines in Mexico; the Marlin property in Guatemala; the Cerro Negro and Alumbrera mines in Argentina; and the Pueblo Viejo mine in the Dominican Republic.

Wall Street analysts feel that the company deserves a premium valuation to its peers due to its excellent balance sheet, growth profile with lower cost new mines, longer average mine life and a solid dividend yield. Over the past few years, Goldcorp has been altering its mine plans, cutting spending and disposing assets in order to reduce costs and focus on the most profitable production.

Goldcorp investors receive a 0.43% dividend. The $24 Merrill Lynch price target compares with the consensus estimate of $18.96, as well as the $18.47 share price at Tuesday’s close.
Kinross Gold

More aggressive investors may want to consider this smaller cap company. Kinross Gold Corp. (NYSE: KGC) engages in the acquisition, exploration, development and production of gold properties. The company’s gold production and exploration activities are carried out principally in Canada, the United States, the Russian Federation, Brazil, Chile, Ghana and Mauritania. It also produces and sells silver.

As of December 31, 2015, the company’s proven and probable mineral reserves included 34.0 million ounces of gold, 41.0 million ounces of silver and 1.4 billion pounds of copper.

Last week, Kinross posted quarterly numbers that were essentially in line with the Merrill Lynch estimates. The company also announced that it is assessing the potential suspension of Maricunga mining activity by the end of October, but for now, the operating guidance remains unchanged.

The $5.75 Merrill Lynch price target is higher than the consensus target of $4.89. The stock closed Tuesday at $5.32 per share.

Silver Wheaton

This is another top company that many on Wall Street favor. Silver Wheaton Corp. (NYSE: SLW) is the largest pure precious metals streaming company in the world. Based on its current agreements, forecast 2015 estimated annual attributable production is approximately 44.5 million silver equivalent ounces, including 230,000 ounces of gold. By 2019, estimated annual attributable production is anticipated to increase significantly to approximately 55 million silver equivalent ounces, including 325,000 ounces of gold.

This anticipated growth is expected to be driven by the Silver Wheaton’s portfolio of low-cost and long-life assets, including precious metal and gold streams on Vale’s Salobo mine and Hudbay’s Constancia project.

Silver Wheaton has 18 long-term purchase agreements and one early deposit long-term purchase agreement associated with silver and gold relating to 27 various mining assets. It has silver and gold interests primarily in the San Dimas, Zinkgruvan, Yauliyacu, Stratoni, Los Filos, Peñasquito, Keno Hill, Neves-Corvo, Cozamin, Minto, Barrick, Aljustrel, 777, Salobo and Sudbury mines, as well as the Rosemont, Loma de La Plata, Constancia and Toroparu projects.

The company posted earnings below estimates, but after an equity financing, the Merrill Lynch team feels that company has a strong $1.32 billion in available liquidity. They also cite higher silver output as a potential positive catalyst, as it is up 24% year over year.

Silver Wheaton shareholders receive a 1% dividend. The Merrill Lynch price target is $24. The consensus target is set at $23.18, and the stock closed Tuesday at $20.16.

Proper asset allocation should always include a single-digit percentage holding of precious metal like gold and silver. Not only do they hedge over the long term, they can really help if the market does go in to correction or bear market mode, as they tend to trade inversely to markets.

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