4 Gold Stocks to Watch in a Lackluster Industry

Gold prices had started 2023 on a solid note but are currently facing headwinds from a strengthening U.S. dollar. The greenback has gained support from the recent slew of U.S. economic data, which suggest that interest rates will remain high for some time. The recent dip in gold prices combined with inflated costs cloud the near-term outlook for the Zacks Mining - Gold industry.Amid this uncertainty, Kinross Gold KGC, B2Gold BTG, Galiano Gold Inc. GAU and Vista Gold Corporation VGZ are well-poised for growth, backed by their strong balance sheets, efforts to lower costs and growth initiatives.

About the Industry

The Zacks Mining - Gold industry mainly comprises companies engaged in extracting gold from mines. The mines may be either underground or open pits. Mining is a long and complex process and requires significant financial resources. It involves exploration to evaluate the deposit's size, then assessing ways to extract and process the ore efficiently, safely and responsibly, and develop the mine before the actual mining process. It normally takes 10-20 years for a gold mine to produce material that can finally be refined. The players in the industry nowadays use a range of sophisticated techniques to extract gold and convert it into dore bars, an alloy of gold and silver, alongside other impurities. These are then sent for purification, after which gold is purchased as bars or coins or used in jewelry or other purposes.

Major Trends Shaping the Future of the Mining-Gold Industry

Gold Prices Recently Losing Steam: Gold had an overall solid run in the second quarter of 2023, averaging a record $1,976 per ounce. At the beginning of the quarter, gold prices were supported by renewed concerns over the U.S. banking turmoil. Prices remained above $2,000 per ounce for most of the quarter but dipped near the end, as the U.S. Fed left interest rates unchanged at its June meeting. In July, the bullion fared better, gaining 3.1% and held its ground at above $1,900 an ounce. A weaker dollar aided gold prices. However, the tables turned in August, as the dollar gained, supported by the recent U.S. economic data reinforcing the view that interest rates will remain high for some time. This has adversely impacted gold prices. Despite this setback, gold prices have gained 3.8% year to date.Efforts to Counter High Costs to Sustain Margins: The industry has been facing a shortage of skilled workforce, causing a spike in wages. Industry players are persistently grappling with escalating production costs, including electricity, water, and material and supply-chain issues. Since the industry cannot control gold prices, it focuses on improving the sales volume and the operating cash flow, and lowering unit net cash costs. The industry participants are opting for alternate energy sources, such as solar or wind farms, to minimize fuel-price volatility and secure supply. Miners are committed to cost-reduction strategies and digital innovation to drive operating efficiencies.India and China to Support Demand: India and China account for around 50% of consumer gold demand. China witnessed a pick-up in gold jewelry demand in the first half of 2023 triggered by the end of the zero-COVID policy and the pent-up wedding demand from last year. Even though demand has recently been weak in India in the backdrop of high prices, demand for physical gold is seasonally higher in the later part of the year, aided by the festival and wedding season in India. Holiday-related spending is expected to boost jewelry demand in China. With scarce mining opportunities and modest recycling levels, India heavily relies on bullion imports to meet its domestic demand.Impending Demand and Supply Imbalance to Support Prices: Depleting resources, declining supply in old mines and the lack of new mines remain inherent threats to the industry. Due to the scarcity of discoveries and exhaustive existing resources, miners prefer building up reserves through acquisitions rather than digging new ones that are inherently risky and capital-intensive. On the demand side, the use of gold in energy, healthcare and technology is rising. The yellow metal has long been considered a safe-haven investment in financial or political uncertainty. Gold demand also continues to be on the rise from central banks. Therefore, there will be an eventual demand-supply imbalance, which is likely to drive gold prices.

Zacks Industry Rank Indicates Dull Prospects

The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. The Zacks Mining - Gold Industry, which is a 39-stock group within the broader Zacks Basic Materials sector, currently carries a Zacks Industry Rank #178, which places it at the bottom 29% of 251 Zacks industries.Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Versus S&P 500 & Sector

The Mining-Gold Industry has outperformed the S&P 500 Index, as well as the Basic Material sector, in a year. The stocks in the industry have collectively jumped 7.6% compared with the broader sector’s rise of 4.1%. The S&P 500 has gained 6.6% in the same timeframe.

Industry's Current Valuation

On the basis of the forward 12-month EV/EBITDA, a commonly used multiple for valuing gold-mining companies, we see that the industry is currently trading at 5.94X compared with the S&P 500’s 11.07X and the Basic Material sector’s forward 12-month EV/EBITDA of 6.78X. This is shown in the charts below.

Over the last five years, the industry has traded as high as 9.26X and as low as 4.63X, with the median being 6.61X.

4 Mining-Gold Stocks to Keep an Eye On

Galiano Gold: The company reported gold production of 66,351 ounces in the first half of 2023. The company raised its gold production guidance for 2023 to a range of 120,000 to 130,000 ounces to reflect higher metallurgical recoveries from its flagship Asanko Gold Mine. In 2022, the mine produced 170,342 ounces of gold, primarily from stockpiles, exceeding the revised guidance of 160,000 to 170,000 ounces. The company has recently awarded a mining contract in accordance with its plans to resume hard rock mining operations at the mine. Backed by these developments, the company's shares have gained 22.2% in the past six months. Galiano expects the mine’s annual gold production to reach 250,000 ounces in 2025. The company has plans to make AGM a significant gold mine in Ghana, with an average annual output of 220,000 ounces per year over its eight-and-a-half-year life.Headquartered in Vancouver, Canada, Galiano Gold has an expected earnings growth of 433% for the current year. The Zacks Consensus Estimate for the company’s fiscal 2023 earnings has moved up 45% over the past 60 days. GAU currently carries a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Vista Gold: VGZ’s flagship asset is the Mt Todd gold project in Northern Territory, Australia. It is one of the largest and most advanced undeveloped gold projects in Australia. The recently completed Mt Todd feasibility study indicated a 7-million-ounce gold reserve and a 16-year mine life. If developed as planned, Mt Todd has the potential to become one of Australia’s top five gold producers. The company recently extended its agreement with the Government of the Northern Territory of Australia regarding the potential future development of the project. VGZ has a strong financial position with no debt on its balance sheet. Also, completion of the exploration drilling program at Mt Todd combined with management’s ongoing efforts to control costs will significantly reduce its expenditures. In fact, in the last reported quarter, the company recorded a 16% fall in operating expenses. VGZ’s shares have declined 10.7% in the past six months owing to the decreasing gold price.The Zacks Consensus Estimate for VGZ’s 2023 earnings is currently pegged at a loss of 5 cents per share. The estimate has narrowed from the loss of 6 cents per share expected 60 days ago. The stock currently has a Zacks Rank #2.

B2Gold: The company reported consolidated gold production of 245,961 ounces in the second quarter of 2023, which was up 17.8% year over year. The total gold production (including 16,740 ounces of attributable production from Calibre) in the quarter was 262,701 ounces. This upbeat performance can be attributed to the strong performance at the Fekola Mine in the quarter. It expects total gold production between 1,000,000 and 1,080,000 ounces for 2023, which includes 60,000-70,000 attributable ounces from Calibre. The company stated that its operations are on track to meet or exceed annual production guidance. In April 2023, the company completed the acquisition of Sabina, which resulted in acquiring the latter’s 100% owned Back River Gold District in Nunavut, Canada. The most advanced project in the district, Goose, is fully permitted, construction ready, and has been de-risked with significant infrastructure currently in place. The Goose Project has an estimated two-year construction period, with the first gold production expected in the first quarter of 2025. The company’s shares have gained 29.7% in the past six months.Headquartered in Vancouver, Canada, B2Gold operates as a gold producer with three operating mines in Mali, the Philippines, and Namibia. The Zacks Consensus Estimate for the company’s fiscal 2023 earnings has moved up 9.4% over the past 60 days. The estimate indicates year-over-year growth of 40%. BTG currently carries a Zacks Rank #3 (Hold).

Kinross Gold: The company reported second-quarter 2023 production of 555,036 gold equivalent ounces, which marked a 22% year-over-year increase. Tasiast delivered record quarterly production and sales due to strong grades and recoveries. Paracatu and La Coipa also witnessed year-over-year growth in the quarterly output. The company expects to produce 2.1 million gold equivalent ounces in 2023. It is on track to meet its guidance for the production cost of sales, all-in-sustaining cost and attributable capital expenditures. The Tasiast 24k expansion project achieved a significant milestone with the completion of construction and initial commissioning. The project is expected to boost production and lower costs and lead to significant free cash flow. Manh Choh is advancing per plan and is expected to come online in the second half of 2024. The company’s shares have gained 31.5% in the past six months.The Zacks Consensus Estimate for the Toronto, Canada-based company’s 2023 earnings has moved up 11.4% over the past 60 days. The estimate indicates year-over-year growth of 11.4%. It has a trailing four-quarter earnings surprise of 31.7%, on average. KGC currently carries a Zacks Rank #3.

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