Investing in Gold - One Man’s Trash & Another’s Treasure 💎🤲

One man’s trash can be another man’s treasure - a saying that applies to the stock market and gold. Last week, gold prices took a knock due to the US jobs data, which could delay the expected rate cuts from the US Federal Reserve.

The market was expecting the US economy to add 180,000 jobs and the unemployment rate to be at 3.9%. Surpassing expectations, data from the BLS (Bureau of Labor Statistics) revealed 272,000 jobs were added last month, and unemployment rose.

How did the markets take the news?

In theory, rapid job growth means more households have money to spend, which, in contrast, causes inflation. This could motivate a central bank to keep rates high to slow down economic growth and move toward its inflation target. Higher rates for longer tend to hinder company growth and may result in lower stocks.

The data on Friday brought stocks to close in negative territory as investors expect higher rates for longer. The US economy is also preparing to release its CPI data this week, with the FED also announcing rates for June.

Here’s a heat map from Finviz that shows how the market closed on Friday. The heat map also reveals the impact on the gold market and its stocks (bottom right corner). Usually, when interest rates rise, this tends to bring gold prices down, and vice versa.

Rising interest rates challenge businesses by increasing costs, limiting growth, and constraining debt management. This can prompt actions like layoffs and reduced investments amid stricter lending conditions. Yet, businesses with substantial cash reserves could capitalise on higher interest rates, securing greater returns and maintaining liquidity. Positive cash flow cultivates adaptability, granting access to higher-yielding securities and diverse investment opportunities for sustained growth.

From the heat map above, we see that some of the stocks that were up by the end of Friday include:

• Apple Inc 📈
• JPMorgan Chase & Co 📈
• Capital One Financial Corporation 📈
• Eli Lilly & Co 📈
• Air Products and Chemicals Inc 📈
  

Gold does not yield interest, which could make it less attractive in an environment of rising rates. When gold prices fall, companies' stocks in gold mining, production, or trading tend to decline, as their revenues and profits could be negatively impacted. On the other hand, it could be wise to diversify into assets uncorrelated with rates to stabilise your portfolio.

Gold, including gold stocks like Eldorado Gold Corporation, Agnico Eagle Mines Limited, and Kinross Gold Corporation, could act as a safety net, possibly allowing investors to benefit when rates start to come down. Last week, the Eurozone cut its interest rate for the first time in five years, becoming the second major global economy to do so during the week. The EU cited progress in tackling inflation as the reason. According to CME Group FedWatch, FED Fund traders are pricing in a rate cut to occur in September this year.

Here’s how gold prices performed in the past year:

Gold prices have increased by almost 20% in the past 12 months, also fueled by geopolitical factors. The mentioned stocks have increased in value by up to 30% within the same period. Here's a financial and earnings performance overview of these gold miners (reported & estimated):

Agnico Eagle Mines Limited (+26%)

Agnico Eagle Mines Limited is among the top five gold mining companies worldwide, with operations in Canada, Australia, Finland, and Mexico.

In Q1 2024, Agnico Eagle Mines achieved record gold production, reaching 878,652 ounces. Production costs were $892 per ounce, with total cash costs at $901 and AISC (All-in sustaining costs) at $1,190. Net income stood at $347.2 million; operating activities generated $1.57 per share ($1.56 before changes in working capital), and free cash flow was $0.79 per share. The company increased its cash position by $186 million and reduced net debt. Expected gold production for 2024 remains steady at 3.35 to 3.55 million ounces, with total cash costs per ounce and AISC per ounce unchanged at $875 to $925 and $1,200 to $1,250, respectively.

"Building on a very strong close to 2023, we are reporting our second consecutive quarter of record operating margins and record free cash flow on the back of solid operational and cost performance. With this strong start to the year, we are well-positioned to achieve our production and cost guidance for 2024," said Agnico Eagle, President and CEO.

Eldorado Gold Corporation (+53%)

Eldorado Gold is a mid-tier gold producer with mining and exploration operations in Türkiye, Canada, and Greece.

In Q1 2024, Eldorado’s gold production rose 5% to 117,111 ounces, with sales of 116,008 ounces at $2,086 per ounce, boosting revenue by 13% to $258.0 million. Production costs increased to $123.0 million, with cash costs at $922 per ounce and all-in-sustaining costs at $1,262. Capital expenditures were $122.0 million. Net cash from operations was $95.3 million, and cash flow before changes in working capital was $108.3 million. Cash reserves were $514.7 million. The company maintains its 2024 guidance of 505,000 to 555,000 ounces, with cash costs of $840 to $940 per ounce and AISC of $1,190 to $1,290 per ounce.

“Coming off a strong fourth quarter, we anticipated lower production in the first quarter with winter conditions affecting the leach kinetics at Kisladag and ore grade variability across the portfolio. Consolidated gold production continues to be weighted to the second half of 2024.” - Eldorado Gold President and CEO.

Kinross Gold Corporation (+53%)

Kinross Gold Corporation is a senior gold mining company with a diverse portfolio, operating in the United States, Brazil, Chile, Mauritania, and Canada.

Kinross boosted production by 13% to 527,399 Au eq (gold equivalent) oz (ounces) in Q1 2024. Revenue surged 16% to $1,081.5 million, driven by a rise in the average gold price to $2,070 per ounce. Production costs per gold equivalent ounce sold slightly decreased to $982, with margins per gold equivalent ounce sold up 20% to $1,088. All-in-sustaining costs remained stable at $1,310 per Au eq. oz. Operating cash flow jumped to $374.4 million. Kinross improved its debt metrics and held $406.9 million in cash and equivalents, with total liquidity nearing $2 billion as of March 31, 2024.

“We have had a strong start to the year and are well-positioned to meet our annual guidance. Our portfolio of mines performed well, driven by strong operational performance, disciplined cost management, and higher gold prices. The Company delivered a 20% increase in margins to $1,088 per ounce sold, which is approximately double the percentage increase in the gold price over the same period.” – Kinross CEO.

Data from Nasdaq revealed that these stocks have a history of beating market earnings expectations. When investing in stocks, investors use metrics like earnings per share (EPS) and price-to-earnings (P/E) ratio to gauge a company's profit per share and its valuation as either overvalued or undervalued.

Given the average P/E ratio of the gold industry of 37.61 from the FullRatio, Kinross Gold Corporation seems fairly valued with a P/E of 37x, while Eldorado Gold Corporation looks overvalued ( P/E 48x), and Agnico Eagle Mines Limited is undervalued (P/E 11x).

Conclusion

When it comes to dividend-paying gold stocks with a low yield, a higher share price could trigger an opportunity for profit-taking (capital gain), while a lower price presents an opportunity to earn higher returns in terms of dividends if payouts remain consistent. Additionally, higher commodity prices could motivate a higher dividend payout.

As gold miners, the above-mentioned companies benefit from higher gold prices, depending on how they manage their costs. On the other hand, investor sentiment contributes to dictating and moving the price of these stocks, which could also present an opportunity to buy closer to earnings. These miners are expected to release their results later next month (July), and a beat in earnings could boost investor confidence, driving the stock price higher.

Interest rates and the movement of the dollar are some factors that impact the gold market. Others include global politics, which may push investors to seek safe havens amid geopolitical tensions and uncertainties. This could present an opportunity for gold mining companies to harvest greater earnings when gold prices are higher during such times.