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What are we looking for?

Large gold mining stocks that may be undervalued despite the recent run-up in the sector.

The screen

We selected the 10 largest gold miners trading on the Toronto Stock Exchange and use StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see whether each is under- or overvalued compared with their price.

We used standard valuation techniques including discounted cash flow, comparables and adjusted book value.

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  • Discounted cash flow (DCF) is a valuation technique where cash flow projections are discounted back to the present to calculate value per share. A higher model valuation compared with price indicates the stock is undervalued.
  • A price comparables technique values the company on the basis of ratios from selected comparable companies. Again, a higher model valuation to price suggests the stock is undervalued.
  • Adjusted book value (ABV) is calculated by multiplying book value per share by its historical price-to-book ratio. We use ABV as a measure of downside risk for a stock – i.e., the lowest price we would expect the stock to drop to under current conditions. ABV uses the company’s balance sheet so we are (indirectly) valuing the company using its assets with this method.

We’ve also included the analyst consensus 12-month 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).

What we found

We see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The StockCalc valuation is a weighted calculation derived from the models and analyst target data. With commodity stocks such as these we can see a lot of variability in valuations with the different techniques used. At times analyst consensus is the best representation of valuation in our models, but that is usually less than 10 per cent of the companies in the StockCalc database.

As we look for attractively priced stocks we see most stocks in this category have performed very well in the past 12 months as gold prices have moved from about US$1,300 to more than US$1,700 per ounce. Yet, with the exception of Newmont Corp., all of the stocks still show more than 30 per cent upside from here over the next 12 months. Macro events driving the price of gold include haven demand, easing monetary policy, especially in the United States, and negative real interest rates.

The various valuation techniques can each provide important insight: For example, a low DCF versus price indicates cash flow needs to be looked at in more detail, such as what we see with Yamana Gold Inc.

In any commodity cycle the most senior producers stock prices tend to move first. That is what we have been seeing in the gold market: The percentage difference between price and StockCalc valuation shows more upside for the smaller companies on the list.

B2Gold Corp., for example, is a low-cost senior producer based in Vancouver with mining operations in Africa and Latin America that is targeting one million ounces of total gold production for fiscal 2020. Our valuation for B2Gold is strongly supported by all of our models in a similar valuation range – from $8.02 price comparables to an analyst consensus price target of $12.62 – with a downside risk price below $5, as shown in the ABV calculation.

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Alamos Gold Inc. is another good example where all of our models and analyst consensus are again supportive of the overall valuation we have for the stock. For Alamos our models range from an ABV of $8.80 to the analyst consensus of $18.99, providing an overall StockCalc valuation of $15.48.

One final note: Readers may notice the StockCalc valuation is the same as analyst consensus for two stocks, royalty and streaming companies Franco-Nevada Corp. and Wheaton Precious Metals Corp. Streaming companies provide the capital others in the industry require, then take a royalty from the operations once they are up and running. Traditional models can undervalue streaming companies given the cash flows can be very much into the future, which is why the StockCalc algorithm chose analyst consensus in these two cases.

Investing involves risk, especially for volatile stocks like these. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

Select TSX-listed gold stocks

CompanyTickerMkt. Cap. ($ Bil.)Recent Close ($)StockCalc Valuation ($)Difference (%)DCF Value ($)Price Comps. ($)ABV ($)Analyst Target ($)1Y Rtn. (%)Div. Yld. (%)
Newmont Corp.NGT-T64.880.9381.110.289.22200.2768.5979.8793.30.9
Barrick Gold Corp.ABX-T58.733.0145.1536.8139.1736.3629.5656.21110.21.0
Franco-Nevada Corp.FNV-T37.0194.56268.0737.849.8484.93101.97268.0796.20.7
Wheaton Prec. MetalsWPM-T26.759.4986.1144.8-5.8634.6431.2686.11116.70.9
Agnico Eagle Mines Ltd.AEM-T21.087.51114.7731.2105.6182.6060.33131.6159.01.0
Kirkland Lake Gold Ltd.KL-T14.552.1589.2571.2154.3791.2778.6791.4321.60.7
Kinross Gold Corp.K-T11.49.0713.7251.228.8212.646.0615.66108.5n/a
B2Gold Corp.BTO-T7.47.1311.5161.411.578.024.7412.62118.20.4
Yamana Gold Inc.YRI-T6.77.0810.6550.4-
Alamos Gold Inc.AGI-T4.311.0215.4840.513.329.288.8018.9984.10.6

Source: StockCalc

Brian Donovan, CBV, is president of StockCalc, a fintech based in Miramichi, N.B.

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