Time to mine value from gold mining?

Gold is up 20% this year thanks to a variety of reasons, including inflation and safe-haven demand. This recent strength in gold prices, coupled with operational improvements, has increased the valuation appeal of the gold mining sector.

Historically, it has been seen that gold mining stocks go up in price after gold rallies. While both gold mining companies and gold have underperformed stocks for most of the last decade1, some positive changes have been noted over the past few years.

After Covid, several gold mining companies got rerated, and their balance sheets started to get cleaner. Companies in this sector are now carrying out more disciplined capex. In addition, more stable oil prices have contributed to a fair degree of margin expansion, and gold mining companies are paying back decent amounts to shareholders in the form of dividends and buybacks*.

Best of all, gold mining stocks have gotten relatively cheaper: currently, the sector is trading below its 10-year average valuations (as measured using the ratio of the enterprise value EV to the EBITDA), offering potential opportunities for investors.

Key players in the gold mining industry — chiefly Newmont, Barrick, and Agnico-Eagle — are trading at valuations that are significantly below their historical norms. This is largely due to their stronger balance sheets and enhanced operational efficiencies, making them particularly attractive investments at these levels.

Historically, there has been a valuation gap between senior gold miners, such as Newmont, Barrick, and Agnico-Eagle, and their smaller counterparts, including Kinross, AngloGold, and Gold Fields. However, this dynamic could be poised for a change.

The smaller mining companies could see a valuation rerating, driven by their robust operational performance, healthy cash flows, and growth potential, which are supported by higher gold prices. Mergers and acquisitions could also strengthen smaller mining companies; for instance, AngloGold recently agreed to acquire Centamin, Egypt’s largest gold miner, for $2.5 billion. This deal, once finalised, should boost AngloGold’s production by around 450,000 ounces per year.

For more actionable insights backed by data and analyses, we invite you to read the latest edition of Netra in its entirety.

*Source: DSP