After a five-year decline, beaten-down Canadian gold miners may be setting themselves up for a turnaround in 2019, analysts say, as healthier cash flows lead to more spending on exploration and development, and more attractive dividends.
The price of gold has only recently come off its bottom. From 2011 to 2013, prices peaked at around US$1,800 an ounce, before the precious metal commenced its plunge to US$1,050, ending in late 2015.
Since then, prices have come back up to around US$1,300, but those higher prices have not benefited Canadian gold mining stocks, according to analyst Andrew Kaip at BMO Capital Markets.
“Gold equities are cheap in a relative, historic context,” he said. “We’re looking at mid-cycle pricing, but the valuations are at trough levels.”
The disconnect, says Kaip, can be attributed to negative sentiment — ranging from apathy to resentment — that has kept investors away, especially if they got burned by the ruinous management policies and cost overruns that destroyed shareholder value in the wake of collapsing gold prices.
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But Canadian gold miners have come a long way since those bad old days, says Michael Siperco at Macquarie Capital Markets.
“We’re seeing lower-cost production almost across the board,” he said. “We’re seeing higher margins. We’re seeing companies that have dealt with a lot of the balance sheet issues that we saw in the sector coming out of 2013.”
There’s still work to be done when it comes to improving environmental, social and governance (ESG) practices, and bringing executive compensations into line, but Kaip says that, from a financial perspective, the gold miners are in much better shape.
Investors may be fixating on rising interest rates south of the border — which will lift the U.S. dollar and put downward pressure on traditional hedges like gold — but Siperco stresses that, when gold prices were at their peaks, the loonie traded at par.
Since then, the Canadian dollar has fallen nearly 25 per cent, which means that, in Canadian-dollar terms, the price of gold has only come down to around $1,680 an ounce from $1,800 — not nearly the same collapse as in U.S. dollars.
As Siperco explains, “The valuation of the Canadian dollar versus the U.S. dollar has meant expanded margins for anyone producing in Canada with a substantial portion of expenses denominated in CAD.” And the same thing can be said for gold miners in South Africa, Australia and Brazil.
Gold prices aren’t really the problem, in other words. On the contrary, Siperco thinks prices at current levels are “modestly supportive” of new development, and that the Canadian gold sector has seen lots of exploration over the past 12 months, which should begin to bear fruit next year.
“We’ve been in this no man’s land where there’s a lot less appetite for stocks,” he said, “but I think that over time, as the free cash flow story becomes more apparent and as you see dividends or cash returns to shareholders start to pick up, you could see some investor appetite returning to the sector.”
Some miners are ahead of the curve on production and will reap benefits sooner. Both Siperco and Kaip have highlighted Agnico Eagle Mines Ltd. as their favourite among Canadian large-cap gold miners.
Next year should be a good one for Agnico, as its Meliadine and Amaruq projects in Nunavut commence production. The company, which benefits from exposure to lower Canadian-dollar-denominated labour costs, is set to increase production 30 per cent by 2020.
Siperco and Kaip also like Kirkland Lake Gold Inc., with promising operations in Canada and Australia. And Kaip adds Endeavour Mining Corp. and Fresnillo plc to the list, although his only large-cap buy at the moment is Agnico Eagle.