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What are we looking for?

The build-up to Iran’s weekend attack on Israel drove the price of gold to an all-time high on Friday before falling back to around US$2,370 later in the day. Geopolitical concerns along with the expectation of falling interest rates underpin a rising price of gold. With that backdrop, what are the StockCalc models telling us for valuations here?

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 is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
  • A price comparables technique values the company on the basis of ratios from selected comparable companies;
  • An adjusted book value 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. StockCalc 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

Gold vs. gold stocks

NameTickerMarket Cap ($ Mil)Recent Close ($)StockCalc Val ($)Diff (%)DCF Value($)Price Comps($)ABV ($)Analyst Target ($)1 Year Return(%)Dividend Yield(%)
Barrick GoldABX-T43241.324.6328.1814.448.3928.7129.4639.95-4.62.2
Agnico Eagle MinesAEM-T42173.584.6485.751.323.97165.04110.49125.5011.92.5
Wheaton Precious MetalsWPM-T32327.171.3475.555.923.9625.4149.15101.945.81.2
Kinross GoldK-T10790.58.789.417.25.237.507.1813.5528.91.8
Pan American SilverPAAS-T9630.626.4127.002.2-0.5112.6729.5138.824.92.1
Alamos GoldAGI-T8342.120.9720.81-0.82.2312.8410.9530.6716.50.6
Endeavour MiningEDV-T7393.630.1833.2810.351.1822.7631.6051.50-11.23.6

Source: Stockcalc

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.

Usually gold stocks have a high correlation to the price of gold. One year ago, I ran the correlation co-efficients (or r2, a measure of fit ranging between minus-one for no fit and plus-one for a perfect fit) between close price and the price of gold over the prior 12 months. Most had an r2 greater than 0.8.

I reran that analysis this week for the past 12 months and six of the 10 companies actually had a negative correlation to the price of gold, meaning that the stock prices and the price of gold were generally going in opposite directions. The price of gold is up 12 per cent over the past 12 months, yet five of these stocks show negative one-year returns in the table below. Only in the past two months have stock prices and the price of gold been moving in the same direction in a highly correlated manner (r2 averaging 0.88 for the last two months).

Interest rates and gold

When real interest rates (the stated rate less inflation) rise, investors move to higher return opportunities like bonds and stocks, and when rates fall, gold prices increase as gold is more attractive relative to other investments. Real interest rates started climbing in June of 2022 and have levelled out over the past year. The price of gold has also moved up since that time. We saw this same process in the late 1970s when gold, inflation and interest rates rose dramatically together. If inflation surges to a second peak, there are predictions of gold rising to as much as US$3,500 by 2026.

Let’s look at a few of these companies: All stocks on this list are dividend payers, which is uncommon for any of the industries in the basic materials sector.

Barrick Gold Corp. ABX-T is one of the world’s largest gold miners. In 2023, Barrick Gold produced nearly 4.1 million ounces of gold and 420 million pounds of copper. Barrick currently has about two decades of gold reserves along with significant copper reserves. Its potential Reko Diq project in Pakistan, if developed, could double copper production by the end of the decade. All of our models along with analyst consensus show further upside to the stock price.

Endeavour Mining PLC EDV-T operates in West Africa (Senegal, Côte d’Ivoire and Burkina Faso) and produced 1.1 million ounces of gold in 2023. The company has an interesting and transparent dividend program tied both to the price of gold (remaining above US$1,500) and their financial leverage (remaining below 0.5 times net debt/adjusted EBITDA). Our models show further upside to its price.

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B. He currently holds positions in WPM and EDV

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