Commodities & Metals

Gold and Silver Investors Have Fewer and Fewer Choices

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If there was ever a year in which uncertainty was the dominant force, 2020 would have to be the poster child. While the reasons to own gold are varying and numerous, gold has been the safety net for centuries. The reasons people buy silver are even more numerous, but silver’s actual of tracking gold and its discount (gold-to-silver ratio) has a mixed history.

On top of tracking gold and silver prices, 24/7 Wall St. tracks the charts and fundamentals of the companies that benefit from the moves in gold. These are generally the miners, but in reality, every company has its own nuances about how its role plays into gold and silver.

Gold has screamed higher in 2020 and has even challenged the $2,000 per ounce mark, and silver has briefly gone above $25 per ounce. Silver has managed to have its own crazy moves. As of Tuesday, August 4, 2020, gold’s gain of over 29% year to date was still dwarfed by a 36% rise in silver.

Some strategists are calling for much higher commodity prices ahead, and the zero interest rate policy of the U.S. Federal Reserve now appears to be quasi-permanent, while Europe and Japan still have negative interest rates. There also has been the equivalent of billions of dollars that have been digitally created to stimulate the economy, with an expectation that even more stimulus will be required until there are vaccines and strong treatments for COVID-19.

Most gold miners are enjoying the high gold prices during the pandemic, but last week showed that even high gold prices can see times when it’s simply more expensive to mine for gold. The good news is that Wall Street deems some of the gold and silver mining stocks to be undervalued. The bad news is that most of the companies are considered to be above their fair market value via the Refinitiv consensus analyst target price.

An issue that gold and silver investors need to consider is that it is getting harder to find bargains in precious metals. The high prices have allowed the underlying stocks to rise above their fair market values, or at least be close to those values. Many of the companies that screen cheaply may have some other underlying issues. Some gold and silver plays miners still offer implied upside at current prices, and these are the ones as of August 4, 2020.

Newmont Corp. (NYSE: NEM) is now the largest gold miner by market capitalization after its Goldcorp merger. It has a vast project in Colorado that will offer strong reserves until 2045 or later. In late July, Deutsche Bank reiterated its Buy rating while raising its target to $74 from $70, and Raymond James more recently raised its target price to $80 from $78.

Jim Cramer hosted an interview with Newmont’s CEO on Mad Money a month ago, and the CEO discussed how much higher gold prices will help its cash flow and what is available for a higher dividend payment ahead. Newmont had been basing its future forecasts on $1,100 gold, so there is a lot of upside with much higher gold prices, if the pandemic costs are not perpetual. Newmont stock was last seen at $68.75, but Refinitiv’s consensus target price is now up at almost $76.

Barrick Gold Corp. (NYSE: GOLD) is still a close second place when it comes to market capitalization of gold miners. In July, Deutsche Bank reiterated its Buy rating and raised its target to $35 from $34. Raymond James reiterated its Outperform rating and a $32 price target. Shares of Barrick traded at $28.75, while the consensus target price is now closer to $31.50.

Kinross Gold Corp. (NYSE: KGC) has seen its shares nearly double in 2020, but even at $9.30 a share, it has a consensus target price up at $9.80. Where that consensus gets interesting is that more upgrades were seen in recent days, with TD Securities raising its fair market price to $12 from $10 and Raymond James raising its target to $10.50 from $9.50.

Kinross now is worth nearly $12 billion. Unlike some of the larger mining stocks, Kinross’s earnings report was a better quality one, as the company said that all its mines continued production during the quarter, with all-in sustaining costs running under $1,000 per ounce and with capital spending plans on track for 2020.

Iamgold Corp. (NYSE: IAG) is much smaller than the larger operations, with a $2.3 billion market cap, but its $4.95 share price is still under Raymond James’s recently raised target of $5.50 (from $5.00). Very few U.S. analysts have targets on Iamgold, and investors should know that this company’s earnings report on Wednesday could make the “cheapness” look better, or it could look much worse. Jumping into value stocks ahead of earnings can be rather painful, and Iamgold has seen some interruptions due to COVID-19.

Endeavour Silver Corp. (NYSE: EXK) saw its shares rally about 5% to $4.50 after earnings, but this comes with a market cap of only $650 million, even after an 80% stock gain so far in 2020. The stock has a consensus target price now close to the current share price, but it looks as though the hurt from restarting of operations is being looked past. Endeavour’s net revenue was just $20.2 million in the quarter, and that came from the sale of 634,839 ounces of silver and 5,218 ounces of gold. Its average selling prices (per ounce) were $17.04 for silver and $1,862 for gold. This company operates three silver-gold mines in Mexico.

Bradford Cooke, Endeavour CEO, commented, “I am pleased to report that notwithstanding the suspension of mining operations during the 2nd quarter due to the COVID-19 pandemic, Endeavour was able to reduce its net loss quarter-on-quarter, as each mine generated positive Mine Free Cash Flow thanks to improved operating performance and higher precious metal prices.”

VanEck Vectors Gold Miners ETF (NYSEARCA: GDX) is the top gold-mining company exchange-traded fund and its top holdings include Newmont, Barrick, Franco-Nevada and Wheaton. The fund was up about 45% so far in 2020, and the $43.25 share price compares with a 52-week range of $16.18 to $44.46. This VanEck ETF now counts net assets under management of more than $18 billion, which looks to be up about 20% from last month, at the same time that many of the components within that ETF are now considered by Wall Street as above their fair value target prices.

There is one thing that may make even the “expensive” gold and silver stocks perform well in the coming months. Silver and gold prices have a lot of support from low and no interest rates, scared investors, uncertainty, trillions of dollars of newly created money and so on.

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