What are we looking for?
The price of gold dropped to a six-month low early Monday, to around US$1,850 an ounce. Investors see higher-for-longer interest rates alongside a relatively soft economic landing, neither of which are supportive for the price of gold. With that backdrop, what are the stockcalc models telling us for equity valuations in this space?
The screen
We used stockcalc’s screener to select the top 10 listed gold mining companies by market capitalization on the TSX. We then used stockcalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see if it is undervalued or overvalued compared with its price.
Overview of the techniques used:
- discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
- a price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
- an adjusted book value (ABV) is calculated by multiplying book value per share by its 10-year average price-to-book ratio;
- if we have analyst coverage, we may consider the consensus target price.
More about stockcalc
Stockcalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. It also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to stockcalc using the promo code “Globe30,”which offers a 30-day free trial and special pricing for the second month.
What we found
You can see in the accompanying table the percentage difference between each stock’s recent close price and its intrinsic value. The “stockcalc valuation” column is a weighted calculation derived from our models and analyst target data if used.
Gold started to rebound Friday after the U.S. personal consumption expenditure (PCE) price index was released, but selling pressure has rematerialized amid another uptick in U.S. Treasury yields.
Treasury yields remain inverted, with the U.S. two-year at 5.10 per cent at midday Monday and the 10-year at 4.69 per cent. Rising interest rates are associated with a stronger U.S. dollar and a decline in the price of gold. The outlook for gold prices in 2024 is mixed, with investment banks such as Goldman Sachs, J.P. Morgan and ABN AMRO expecting gold to reach US$2,000 to US$2,200, whereas the International Monetary Fund and World Bank see it falling to the US$1,700-to-US$1,800 range.
All stocks on this list are dividend payers, which is uncommon for any of the industries in the basic materials sector.
Let’s look at a couple of these companies:
Agnico Eagle AEM-T is a gold miner with mines in Canada, Mexico, Finland and Australia. It produced more than 3.1 million ounces of gold in 2022 and had about 15 years of gold reserves at the end of 2022. Agnico bought the remaining 50 per cent of its Canadian Malartic mine along with other assets from Yamana Gold in 2023. It expects to produce 3.2 to 3.4 million ounces at a cost of $1,140 to $1,190 per ounce in 2023. All of our models show further upside to its price.
Endeavour Mining EDV-T operates in West Africa (Senegal, Côte d’Ivoire and Burkina Faso) and produces 1.5 million ounces of gold annually. The company has an interesting and transparent dividend program tied both to the price of gold (remaining above US$1,500) and the company’s financial leverage (net debt to adjusted EBITDA remaining below 0.5 times). All of our models show further upside to its price.
Investing involves risk. Stockcalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.
Brian Donovan, CBV, is the president of stockcalc, a Canadian fintech based in Miramichi, N.B.