Don't look now, but gold is quietly putting on a show. Though the lustrous yellow metal is essentially flat over the trailing one-year period, it recently touched an 11-month high. Weakness in the U.S. dollar, which gold tends to move opposite of, as well as growing uncertainty from the Trump presidency and North Korea, have created a favorable environment for gold.
Often known as a safe-haven investment, investors fearing a correction in stocks following an eight-plus year bull market rally have certainly been nibbling of late. The recent rally in spot gold could mean good things for miners that produce the yellow metal. After all, higher spot prices should lead to higher margins, assuming expenses don't rise at a faster rate than gold.
With spot gold having bounced $250 an ounce from its lows in early 2016, mining companies are once again being tempted to expand existing mines and look into the possibility of bringing new projects into commercial production. This production expansion, coupled with higher gold prices, is the perfect recipe for strong earnings-per-share growth among gold stocks. In fact, based on Wall Street's consensus estimate, five gold stocks are poised to see their annual EPS at least double between 2016 and 2020. Here's a brief look at those five shining stars.
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Goldcorp: $0.31 (actual) in 2016 vs. $0.69 (estimate) in 2020
For those of you who follow gold stocks, seeing Goldcorp (GG) on this list should come as no surprise. The company leads by example in both production expansion and cost management. In terms of production, the company is focused on continuing to ramp up its Eleonore and Cerro Negro mines. Between now and 2022, management's goal is to expand total production and its asset reserves by 20%, while at the same time lowering its all-in sustaining costs (AISC) by 20%.
Goldcorp has also been a marvel to watch in terms of cost-cutting. Not only does Goldcorp benefit from the byproducts it produces, which helps to offset the costs of mining gold, but it's finding ways to eliminate an aggregate of $250 million in annual costs by analyzing each of its mines and looking for ways to improve yields. This year, it will recognize about $200 million in efficiency savings, and management says to expect its $250 million saving target to be raised in the future. No shocker here that Goldcorp has the second-lowest AISC of the major gold producers.
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Yamana Gold: $0.05 (actual) in 2016 vs. $0.20 (est.) in 2020
While Yamana Gold (AUY) is also keenly focused on reducing its AISC, its management is OK with higher costs in the interim in order to bring new production on line. Over the next two years, three key projects could yield up to a 35% to 40% boost in total gold production by the end of the decade.
Next year, two key projects are expected to enter commercial production: Cerro Moro and C1 Santa Luz. Cerro Moro has remained on track and budget, according to Yamana's second-quarter earnings release, and it's expected to yield 150,000 ounces of gold and 7.2 million ounces of silver annually for the first three years. C1 Santa Luz, which is being recommissioned, could have up to a 10-year lifespan with an average of 114,000 ounces of gold being produced annually. Also, by 2019, the Suruca development within the Chapada mine could add up to 60,000 ounces annually for a period of five years.
Once this production is on line, costs for Yamana should fall considerably and cash flow will rise, which will be key to reducing its debt, and Yamana's full-year EPS could soar.
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Agnico-Eagle Mines: $0.57 (actual) in 2016 vs. $1.29 (est.) in 2020
The importance of controlling capital expenditures and production costs simply cannot be stressed enough, with Agnico-Eagle Mines (AEM 1.57%) also among the lower-cost AISC producers. In fact, the company recently boosted its production forecast for this year and cut its cash costs per ounce of gold (not to be confused with AISC).
Like the companies discussed previously, Agnico-Eagle has benefited from organic growth at existing mines and the expectation of new production coming on line. The Canadian Malartic mine, which is coincidentally jointly owned with Yamana Gold, saw an 11% improvement in ore grade this past quarter, boosting gold production, while its flagship LaRonde mine saw an uptick in ore grade and six-month production despite planned maintenance adversely affecting production during its most recent quarter.
Meanwhile, the Nunavut region mines have been a big bright spot, with Meadowbank's production soaring and a number of developments remaining on track. In particular, the Meliadine underground project is ahead of schedule. Slated to begin commercial production in the third quarter of 2019, Meliadine has measured and indicated resources of 3.3 million ounces of gold.
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IAMGOLD: $0.01 (actual) in 2016 vs. $0.09 (est.) in 2020
Unlike the previous three gold stocks, IAMGOLD (IAG -0.55%) is a predominantly African-based mining company, with three operating mines and a host of developing projects. Mining companies in Africa usually deal with higher labor costs as a result of government uncertainty in select countries and the propensity for strikes among laborers. However, if IAMGOLD is successful in expanding its production capacity, it should be able to lower its AISC to attractive levels, thusly boosting its EPS in the process.
Of particular interest is IAMGOLD's June divestment of 30% of its stake in the Cote Gold Project to Sumitomo Metal in Ontario. The company has struggled to get Cote off the ground despite purchasing Trelawney Mining, which owned Cote, for a 37% premium in 2012. Originally expected to produce upwards of 400,000 ounces of gold annually, Cote could be a major needle mover for IAMGOLD, but it'll need the capital and expertise of Sumitomo to make that happen. Nevertheless, the higher costs associated with African miners makes IAMGOLD a riskier long-term bet than most gold stocks.
Image source: Eldorado Gold.
Eldorado Gold: $0.07 (actual) in 2016 vs. $0.28 (est.) in 2020
Finally, Eldorado Gold (EGO -0.40%) is expected to see some explosive profit growth as a result of new mines coming on line and as a function of its low AISC.
Eldorado, which has key mines throughout Greece and Turkey, struggled with production at its flagship Kisladag mine in Turkey during the second quarter, with gold production lower by 23%. But instead of focusing on current production, all eyes are on the potential for the Skouries and Olympias mines in Greece. Of note, Skouries is expected to have an approximate 25-year life span, of which 3 million ounces of gold and 1.5 billion ounces of copper could be mined. This would be game-changing production growth if both of these Greek mines come on line before the end of the decade.
However, Eldorado Gold's development timeline for Olympias and Skouries is currently in question. Eldorado and Greek regulators have been locked in a battle over environmental regulations. Set to head to arbitration, it's possible Skouries' commercial production could be pushed back a year, if not longer, if the proceedings don't fall Eldorado's way. This high-risk gold stock is one for farsighted investors to consider socking away.
