Stocks were on a tear in April, almost clawing back everything they lost in March.
Much of that rally has been pinned on the hopes that lockdowns would be over and the coronavirus would be sorted in short order.
But the more we hear from medical experts and more fundamentally, from the rising numbers of sick and dead, this isn’t going to be as easy or painless as many anticipated.
That means you need to have a good, reliable hedge. And for decades, that hedge has been gold.
One reason gold is a good choice now it that as the dollar weakens, gold becomes more attractive. A strong dollar makes gold a less attractive buy since it’s more expensive and holding gold comes at a cost (storage fees, etc).
Also, COVID-19 has meant many mines stopped or reduced production, which lowers supply in a time of increasing demand. Gold is up 14% year to date and mining stocks are leveraged to that performance:
The miners above are all A-rated by my Portfolio Grader I use to find Growth Investor recommendations.
About two-thirds of the gold mined today comes from just 9 countries. China is the top producer, with about 12% of production in 2019.
But that’s not a big number. Given China’s size, that illustrates how gold is distributed fairly evenly around the world. And that means there are plenty of opportunities for gold miners to find gold in a variety of places, as long as they can mine it profitably.
EGO is a Canada-based company with mines located in Canada, Greece, Serbia, Romania, Turkey and Brazil. Most of these countries aren’t known for their gold production, but EGO has been mining successfully for nearly 3 decades now, so it has the formula down, and little competition in its markets.
The stock is up 141% in the past year, most of which came before COVID-19 hit. It’s only up 8% year to date. That means there’s more here than a timely trade.
Another Canada-based miner that has been around since 1990, IAG has just 5 mines but generates enough gold to maintain a $1.7 billion market cap.
It has one mine in Canada, one in Suriname, one in Burkina Faso and two joint ventures in Mali. The company produced 762,000 ounces last year. The cost to produce gold is around $870-900 an ounce, so its margins are certainly strong right now.
And given the fact that gold prices are likely to rise as the dollar weakens (or stays weak) due to all the stimulus cash that has been dumped into the economy, IAG is in a very good position to reap the benefit.
The stock is up 38% in the past 12 months, but year to date it’s off 4%. That means it hasn’t been bid up to the moon yet. And if you’re looking for growth stocks, not just hedges, there are some I’m particularly excited about now.
This South African miner has been around since 1950, and it’s woven into the fabric of the South African precious metals and gemstone mining family there. It also has growing gold and silver operations in Papua New Guinea.
Much of its mining is done via open pit mining rather than subterranean mining. It also has a division that remediates it mining efforts once a mine has been tapped.
It has significant gold and copper reserves and also has some silver reserves as well.
COVID-19 has slowed production in its mining operations in the second quarter, but expectations are that production will be back to normal by Q3. Its plan is to be able to reliably produce 1 million ounces a year until 2030.
HMY is up 118% in the past 12 months, but is off 3% year to date.
This Canada-based miner has only been around since 2003, but it has grown significantly, acquiring smaller miners to build its opportunities.
Yamana can be considered a diversified miner, even moreso than HMY, because it also produces a significant amount of silver and copper.
In my Growth Investor buy list, I prefer companies with an economic “moat” around their business, and in some industries, diversification is what provides that stability. By diversifying, the company mitigates the swings many gold-only miners go through when the Midas Metal is out of favor.
Copper and silver are both key industrial metals and help provide steady revenue when the global economy is under full sail. AUY has a nearly $5 billion market cap, so its one of the larger players in this sector, which also helps keep its price steady over the long haul. On the other hand, it’s less leveraged to gold rallies.
It has mines in Canada, Brazil, Chile and Argentina, which keeps it in pretty politically stable countries. Its stability has paid off this year – AUY is up 150% in the past year, and 28% year to date.
This Canada-based firm is a senior gold producer with a market cap of more than $5 billion. It has 3 mines in operation — in Mali, Philippines and Namibia. It also has one in development in Colombia and another under exploration in Burkina Faso as well as other locations.
That’s a pretty good track record for just 13 years in the business. The company is also producing more than 1 million ounces a year currently.
Remember that mining gold (or anything else for that matter) is like drilling for oil or farming. It’s all about the difference between what it costs for you produce it and how much people will pay for it. The lower the cost of production, the higher your margins.
That’s why many mining operations are in far-flung countries where labor is cheap and regulations aren’t as onerous. There are other costs to operating in middle of nowhere, but that’s the balancing act these companies play to grow their profits.
The stock is up 94% in the past year and almost 30% year to date.
Slime dams and sand dumps. That’s how South African DRD makes most of its money. The stock is up 439% in the past 12 months and 89% year to date.
Granted, the stock is relatively small, sitting at an $813 million market cap after that massive move. It’s positively tiny, in fact, compared to the large-caps I target at Growth Investor.
But the fact is DRD has a reliable, low-cost way to add to gold reserves. It cleans up mines — more accurately their slime dams and sand dumps — after other miners have left.
Just like in oil fields, most firms don’t extract all the gold that a mine might have. Their equipment isn’t built to grab it all. DRD specializes in getting tailings left by other miners. That means no exploration costs or risks. And, the country will pay to have you do a bit of cleaning.
It may not be a conventional business model, but it’s kept them in business for 125 years, so they’re doing something right. And the stock has a 2.2% even after its huge run.
This Canadian company is one of the top gold miners in the world. It operates 3 mines in the US, and 1 each in Chile, Brazil, Mauritania, Ghana and Russia.
Last year it produced 2.5 million ounces, with more than half of that coming from its operations in the Americas. Its sole Russian mine was slightly more than 20% of that production total.
Its all-in sustaining costs were $983 an ounce, which means the rest is gravy. Of course some of that is put back into exploration and development. But that’s a pretty sweet margin give that gold is around $1740 an ounce.
KGC’s market cap is around $8.7 billion at this point. The stock is up 133% in the past year and 54% year to date, but KGC is trading at a trailing P/E of 11 after that huge run, so it’s still pretty cheap.
I will say that cheap P/Es aren’t everything. One key thing to keep in mind is that gold is not a growth investment. Remember, it’s the investing equivalent of stashing cash under your mattress.
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