Everyone’s favourite crisis investment, gold, is having a resurgence. The recent turmoil in the banking sector, as well as persistent inflation, have driven up the spot price above $2,000, placing gold ETFs and funds at the top of the performance lists at the end of March.
We have five gold miners under our coverage at Morningstar – three of them we consider to be undervalued, one is slightly overvalued, while one is trading around its fair value. These are the stocks our equity analyst John Mills say are worth considering for your portfolio.
At the moment, Newcrest Mining (NCM), Newmont (NEM) and Barrick (GOLD) are trading slightly below our fair value estimates, at discounts of 12%, 11% and 8%, respectively.
Mills explains that gold prices have risen recently due to fears regarding over the financial system as well as a potential recession. Higher gold prices have supported gold equities, but concerns remain over rising interest rates, which increase the opportunity cost of holding gold, as well as cost inflation for miners. Gold doesn't pay an income so looks less attractive when cash and bonds pay a decent yield.
“Gold investment lacks cash flows for owners, and rising yields make bonds relatively more attractive. Meanwhile, inflation in labour, fuel, and other costs is pushing up the cost curve and affecting gold miners’ margins,” Mills says.
Meanwhile, Agnico Eagle (AEM) is trading at an 8% premium and Kinross (KGC) appears fairly valued.
All these stocks, bar Kinross, feature in the top six in the Morningstar Global Gold index, which is so far up 16% this year in dollar terms despite a slight dip in February. But the index, which measures global companies engaged in gold ore-related activities, has still to reach the highs of the pandemic, or the brief peak when war broke out in Ukraine (before its subsequent plummet).
Looking ahead, Mills says that Morningstar now assumes gold prices will average at about $1,880 per ounce until 2025 (up from a previous estimate of $1,810) and has raised its medium term price to $1,700 per ounce from 2026 (up from about $1,600).
Gold tends to be relatively uncorrelated to the broader economic cycle with perceived safe-haven investment attributes while also being seen as an inflation hedge.
“Investment and jewellery take up most of global gold demand, and a demand slowdown is the key risk to cash flows. A reduction in Chinese fixed-asset investment, lowering demand for copper, would also have some impact,” he adds.
That said, both the Royal Mint and the World Gold Council recorded an uptake in gold demand in 2022. The Royal Mint saw a near 26% uplift year-on-year in the number of gold investments, and cites market uncertainty and inflation hedging as main reasons for the uptick.
Meanwhile, the World Gold Council found that annual gold demand (excluding over the counter or OTC trades) in 2022 increased by 18% year on year to the highest annual total since 2011. It found that central bank buying and strong retail investment drove demand.
The Gold Stocks to Consider
Analysis by John Mills
Newmont (NEM)
Newmont is the world’s largest gold miner, producing around 6 million attributable ounces of gold in 2022 and accounting for about 5% of total 2022 mined production. Newmont’s all-in sustaining cost of around $1,200 per ounce in 2022 places the company toward the upper end of the second quartile of the gold AISC curve—not low enough to justify a moat, in our view. We forecast Newmont will increase attributable gold production to around 6.4 million ounces in 2027. The increase is driven by higher gold production from the company’s 38.5% stake in the Nevada Gold Mines joint venture with Barrick along with its mines in Ghana and 40% stake in the Pueblo Viejo mine in the Dominican Republic. This is partially offset by falling production at its Yanacocha mine, which will reach the end of its life toward the end of our five-year forecast period. Newmont’s 38.5% share in NGM and the Ahafo and Boddington mines account for roughly 45% of midcycle production in 2027.
Barrick Gold (GOLD)
Barrick is the world’s second-largest gold miner, producing nearly 4.1 million attributable ounces of gold and about 440 million pounds of copper in 2022. Barrick’s AISC of around $1,200 per ounce in 2022 places the company toward the upper end of the second quartile of the gold AISC curve, which is also not low enough to justify a moat. We forecast Barrick to increase attributable gold production to around 4.6 million ounces in 2027, driven by increased production at its NGM joint venture with Newmont and its 60%-owned Pueblo Viejo mine in the Dominican Republic. Its share of the NGM joint venture, Pueblo Viejo, and Loulo-Gounkoto account for around two thirds of Barrick’s midcycle production in 2027.
Agnico Eagle Mines (AEM)
Agnico Eagle produced around 3.1 million ounces of gold in 2022, making it the world’s third-largest gold miner. It is lower-cost than its larger competitors Newmont and Barrick, with its AISC of roughly $1,100 per ounce in 2022 placing Agnico around the middle of the second quartile of the gold cost curve. However, similar to Newmont and Barrick, we don’t think its unit costs are low enough to justify a moat. We forecast Agnico Eagle’s gold production to be about 3.6 million ounces in 2027. This is driven by the purchase of the remaining 50% of its Canadian Malartic mine in 2023 and increased production at its Macassa, Meadowbank, and Detour Lake mines, partially offset by lower production at its Fosterville mine in Australia. Detour Lake, Canadian Malartic, Meadowbank, Meliadine, and LaRonde account for more than 70% of Agnico Eagle’s midcycle production in 2027.
Kinross Gold (KGC)
Kinross produced more than 1.9 million attributable gold equivalent ounces in 2022. Kinross has the highest unit costs of the gold miners that we cover. Its average AISC of roughly $1,300 per gold equivalent ounce in 2022 places Kinross at around the 55th percentile of the gold cost curve. We forecast Kinross’ attributable production to modestly decline to about 1.8 million gold equivalent ounces in 2027. Kinross’ Paracatu mine in Brazil and Tasiast mine in Mauritania account for more than half of its midcycle production in 2027.
Newcrest Mining (NCM)
Newcrest is a gold-copper miner with mines in Australia, Papua New Guinea, Canada, and its minority-owned mines in Ecuador. We estimate the company will produce more than 2.1 million ounces of gold and around 140,000 metric tons of copper in fiscal 2023, with the acquisition of Brucejack resulting in gold production increasing to average more than 2 million ounces per year for the next decade. Around 80% of its estimated midcycle revenue is from gold with most of the remainder from copper. Newcrest has no moat despite a history of low-cost production, save a cost spike around 2013, and long mine lives. It accounts for less than 2% of global mine production and is a price taker.
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