With gold prices dropping, most gold stocks have given up double-digit gains in recent months after a jaw-dropping start to the year. But today, gold stocks are a lot more than just gold prices, with gold companies striving hard to reduce dependency on prices by becoming leaner and stronger.
Keeping that in mind, three gold stocks look particularly compelling today from a long-term perspective: Barrick Gold (GOLD 0.71%), Royal Gold (RGLD 0.88%), and Agnico Eagle Mines (AEM 0.58%).
Image source: Getty Images.
Barrick Gold: Dominating the industry
While most gold companies disappointed in the third quarter, Barrick was an exception for three main reasons:
- It turned in a profit of $175 million, compared to losses of $264 million in the year-ago quarter.
- It lowered its all-in-sustaining-costs (AISC) guidance for the full year to between $740 and $775 per ounce.
- It upped its full-year gold production guidance to between 5.25 million and 5.55 million ounces.
Those figures place Barrick at the lowest end of the cost curve, which is an incredible competitive advantage to have in an industry as volatile as gold mining.
In fact, Barrick staged a remarkable turnaround in 2016. Like those of most gold miners, Barrick's bold investments during peaks saddled it with humongous debt that became a major growth hurdle. This year, Barrick shifted focus to deleveraging and is on track to reduce debt by $2 billion, backed largely by aggressive non-core asset sales. That still leaves the miner with around $8.5 billion in debt, but 60% of that isn't due for maturity until 2032, and only about $200 million will mature before 2019. Thanks to its cost-cutting efforts and optimized capital spending, Barrick generated free cash flow (FCF) of $1.5 billion in the trailing twelve months.
With Barrick now striving to remain FCF-positive at gold prices as low as $1000 per ounce and targeting AISC below $700 per ounce by 2019, investors can look forward to higher FCF and dividends in coming years. That makes Barrick one of the top gold stocks to invest in today.
Royal Gold: A unique gold play
Royal Gold doesn't own and explore mines like Barrick, but buys precious metals from miners at fixed costs in exchange for up-front funding. That offbeat business model makes Royal Gold an intriguing and compelling investment choice.
For starters, Royal Gold enjoys incredibly low costs for two reasons: It doesn't have to bear any costs related to exploration, operation, or maintenance of mines; and it secures bullion streams from miners at rates substantially below spot rates. Consider this: Royal Gold generated $117.9 million in revenue in its fiscal first quarter ended Sept. 30, 2016, against cost of sales (which is simply the cash it pays to purchase gold and silver from miners) of only $22.7 million. The streamer's quarterly revenue and earnings per share hit record highs, setting the tone for a strong year ahead.
Thanks to its low costs, Royal Gold leverages investors to gold prices with significantly low risks. That, perhaps, is the biggest argument in favor of investing in the company. Unless gold prices fall off the cliff, Royal Gold should still be making enough cash to sustain operations. For investors, that also means stable and growing dividends -- Royal Gold has raised its dividends for 16 straight years now:
Image source: Royal Gold investor presentation.
I think that one chart alone makes Royal Gold a solid gold stock to bet on today.
Agnico Eagle Mines: A focused gold miner
I was torn between Agnico Eagle and Goldcorp (GG) while picking my third gold stock, but Agnico's lower AISC, despite being a smaller-sized player, caught my attention. At $821 per ounce, Agnico's AISC for the nine months ended Sept. 30, 2016 was substantially lower than Goldcorp's AISC of $896 per ounce for the same period.
I'm also impressed by Agnico's growing free cash flows, which are not only higher than Goldcorp's, but have also been more stable in recent years:
AEM Free Cash Flow (TTM) data by YCharts.
Agnico's strong cash flows can be largely be attributed to prudent capital decisions, whereby management focused mainly on advancing production at acquired mines instead of expanding its asset base. Also, Agnico's operations aren't as heavily exposed to geopolitical risks as senior miners, as its mines are located in relatively stable regions like Canada, Finland, and Mexico. Today, Agnico is Quebec's largest gold producer.
A focus on exploring its high-grade gold reserves has enabled Agnico to keep its AISC below the industry average and grow its cash flows, enabling the company to pay a dividend every year for 34 years. At 1%, Agnico's dividend yield is also higher than that of Barrick's and Goldcorp's. Overall, I believe Agnico's established resource base, low costs, and stable cash flows should be rewarding for shareholders in the long run.
