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What are we looking for?

The U.S. consumer price index in October was up 6.2 per cent from a year ago, the U.S. Labour Department reported last week. It was the biggest annual increase in the CPI since 1990. In inflationary times, gold and other commodities tend to rise, which supports higher stock prices for the underlying companies. With that backdrop, are there firms in this industry presenting investment opportunities? What are the StockCalc valuation models telling us?

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 whether 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 look at 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

The top 10 listed gold mining companies by market capitalization on the TSX

CompanyTickerMkt. Cap. ($ Mil.)Recent Close ($)StockCalc Val. ($)Diff. (%)DCF Value ($)Price Comps ($)ABV ($)Analyst Tgt. ($)1Y Rtn. (%)Div. Yld. (%)
Newmont Corp.NGT-T55,168.273.7082.8212.4114.18117.2973.67103.52-10.83.7
Barrick Gold Corp.ABX-T40,833.326.0628.649.951.0832.5428.3941.84-22.01.8
Agnico Eagle MinesAEM-T15,964.371.5973.032.0103.2358.1965.11120.16-25.02.4
Kirkland Lake GoldKL-T13,924.856.2165.6716.8118.6368.3661.6375.16-3.41.7
Kinross Gold Corp.K-T8,682.78.699.509.317.7011.497.1014.37-15.11.7
Endeavour MiningEDV-T7,202.533.5542.8827.857.5635.6456.3852.3613.12.1
Yamana Gold Inc.YRI-T4,812.05.605.976.78.972.323.7110.04-20.12.7
B2Gold Corp.BTO-T4,649.15.646.7519.720.177.955.5910.30-25.93.6
SSR Mining Inc.SSRM-T3,983.924.7128.7216.248.7012.9223.5439.62-3.81.0
Alamos Gold Inc.AGI-T3,622.610.8710.70-1.69.937.778.5816.50-6.61.1

Source: StockCalc

You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The StockCalc Valuation column is a weighted calculation derived from our models and analyst target data, if used.

It is also worth noting that, with one exception, these gold stocks are down anywhere from 3 per cent to 25 per cent over the past 12 months, while the price of gold itself has been largely flat. (The S&P/TSX Composite Index is up about 28 per cent in the same period.) We can only assume gold stocks were sold into the dips, with money moved into the broader market, or possibly crypto, and not returning. That trend could reverse: We should see outperformance of gold stocks versus S&P/TSX if the yellow metal’s price continues to climb.

A few trends jump out when we look at the different model results in more detail.

The DCF calculations for all but one company (Alamos Gold Inc.) are higher to significantly higher than their recent closing prices. We will see this whenever companies are going through an up cycle with the underlying commodity.

The comps valuations are split six above and four below the recent close, which is understandable and could be a good secondary indicator of potential upside for those above.

The ABVs are generally the closest to recent close prices and reflect the value based on the underlying assets of each firm.

Finally, we see analyst consensus generally falling somewhere in between the other models and above the recent close, implying more focus on DCF modelling by the analysts.

Let’s look at a couple of these companies:

Endeavour Mining PLC operates in West Africa (Senegal, Ivory Coast and Burkina Faso) and produces 1.5 million ounces of gold annually. The company has an interesting and transparent dividend program that is tied both to the price of gold and their financial leverage. Endeavour was the best performing stock over the past 12 months from our list and our models show further upside to its price.

B2Gold Corp. has operating gold mines Mali, Namibia and the Philippines and produces a bit more than one million ounces of gold annually. In October, it announced the sale of its Burkina Faso development project and in June started arbitration proceedings against the Mali government after B2Gold was informed it would not be granted a one-year extension of a mining permit there. Positive and negative factors such as these need to be considered in the company’s valuation. You can see our valuation for B2Gold is closer to comparables and adjusted book value than to DCF, suggesting we could expect an upside bump if and when the Mali proceedings are resolved.

Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

Full disclosure: The author currently holds positions in SSRM and BTO.

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

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