The stock market has been taken for a wild ride in 2016, but volatility is nothing new for longtime investors. The year began with the worst two-week decline ever recorded, and it was followed by the most voracious intra-quarter rally we've seen since 1933. More recently, all three major indexes have thrusted to new all-time highs.
While many investors have been given a case of indigestion in 2016, precious metal investors have been too busy sitting back and sipping on champagne to notice. Even following what's been a rough week for the latter after hawkish Fed commentary, 17 of 22 gold miners with a market cap of $300 million or higher are up at least 100% year to date through Aug. 25, and all six silver miners with a $300 million market valuation or higher have risen by at least 117% year to date.
Yet, here's what's really intriguing: Despite these huge gains, many gold and silver stocks still appear to be exceptionally undervalued relative to the S&P 500 (SNPINDEX:^GSPC). How? Look no further than the price-to-cash flow per share ratio.
Gold and silver stocks look cheap based on this metric
Cash flow is of critical importance to all businesses, and to investors who are hoping to evaluate a company or set of companies. Investors obviously want to see a company generate positive cash flow from its operations, since positive cash flow is what allows for a company to reinvest in itself, make acquisitions, reward shareholders via dividends and stock buybacks, and in the simplest of cases to keep the lights. The more positive cash flow a company has, presumably the more financial flexibility it has as well. Thus, the cheaper a company is valued relative to its cash flow on a per basis, the more undervalued it may be.
Right now, according to metrics from CSIMarket.com, the S&P 500 is valued at about 8.7 times its cash flow per share (P/CFPS). As you might imagine, this figure is subject to some fluctuations on a quarter-by-quarter basis. For instance, with crude plunging in 2015, the S&P 500's P/CFPS was above 17 at the end of the second quarter. Generally speaking, the S&P 500's P/CFPS is often between 10 and 20.
However, if you look at gold and silver stocks, you'll find substantially cheaper alternatives on a price-to-cash flow per share basis, especially after this latest correction. In many instances, you can find mid-to-high single-digit P/CFPS among gold and silver miners.
Yamana Gold could be a cash flow bargain
Take low-cost producer Yamana Gold (NYSE:AUY) as a prime example. Yamana has been pretty much beaten to a pulp since it and Agnico-Eagle Mines teamed up to purchase Osisko's mining and exploration assets in 2014. Combined with falling precious metal prices up until this year, Yamana shares tumbled from more than $20 in Oct. 2012 to an intraday low of $1.38 in Jan. 2016.
But Yamana has a bright future, even with less cooperative copper prices, which Yamana uses as a byproduct to offset its gold mining costs. In the second quarter, we saw operating cash flows from Yamana jump by about a third from the previous year to $202 million, with the company pointing to higher production on the horizon. Early next year Yamana expects Riacho dos Machados, a gold and copper mine acquired for $51 million from Carpathian Gold, to be fully operational and on its way to producing up to 100,000 ounces of gold annually at an all-in sustaining cost (AISC) of less than $800 an ounce. Yamana also expects that both Cerro Moro and C1 Santa Luz will be ready for production by 2018, joining strong producers like El Penon and Gualcamayo in the coming years. Even with its AISC rising 12% year over year to $964, Yamana is still working with gross margins well in excess of $350 per gold ounce.
Based on Wall Street's estimates, Yamana is capable of $0.68 in CFPS in 2016, $0.81 in 2017, $0.91 in 2018, and $1.10 in 2019. This means Yamana is valued at only 6.6 times this year's CFPS and only four times fiscal 2019's projected cash flow per share.
Kinross Gold, the cash flow cheapness king
Among gold miners, there may be no mid-cap or large cap that has a more attractive valuation based on the P/CFPS ratio than Kinross Gold (NYSE:KGC).
Kinross got itself into a lot of trouble earlier in the decade when it acquired Red Back Mining for $7.1 billion in order to gain hold of the company's flagship Tasiast Mine. Due to gold's devaluation beginning in 2011, Kinross was forced to write down the value of its purchase by nearly $5.6 billion in the years to follow. However, Kinross earlier this year announced a ramp-up in production at Tasiast that'll boost milling capacity by 50% to 12,000 tons of ore per day by the Q1 2018. This move, which is costing Kinross an estimated $728 million in expansion and stripping costs, should lower Tasiast's cash costs by more than 45% to $535 an ounce, and its AISC could dip below $700 per gold ounce with continued expansion.
Kinross has also been maneuvering to gives itself more financial flexibility. Following its Q3 debt maturities, the company has no debt coming due until 2020, which is a major financial burden lifted off its and shareholders' backs. It's also been spending far more wisely than it did in 2010, meaning we're seeing lower capital expenditures as a whole.
Trading at only $4.34 a share as of Aug. 25, Kinross is forecast by Wall Street to generate $0.85 in CFPS in 2016, $1.02 in 2017, and $0.99 in 2018. In other words, Kinross is trading at just five times its CFPS this year and four times its 2017 and 2018 forecasts. That's cheap!
For those who like to speculate
For those precious metal investors out there who have a stomach of iron and can tolerate the volatility seen in smaller-cap miners, you could also give serious consideration to beaten-down miners Primero Mining (NYSE:PPP) or Great Panther Silver (NYSEMKT:GPL).
Primero Mining has been dealing with significantly higher costs in 2016, along with an ongoing tax overhang. In Q1, it shut down portions of its San Dimas mine to improve safety aspects of the mine, which reduced gold output and raised costs. Its Mexican subsidiary has also been quarreling with Mexican tax authorities who've attempted to invalidate the company's Advanced Pricing Agreement. The APA is what determines how much of Primero's profit the Mexican government receives. These overhangs have crushed its share price.
However, we're also looking at a lot of near-term issues that should give way to long-term production growth and substantially lower costs. San Dimas has generated consistent growth for years at a low cost, while AISC at Black Fox in Canada has been steadily dropping. Once Cerro del Gallo comes on line in the popular Guanajuato district in Mexico, we could be looking at a surprisingly low-cost miner. Primero is currently valued at less than three times its projected cash flow per share in 2017.
Silver and gold miner Great Panther Silver has been beaten down by high mining costs, and more recently a quarterly loss of $0.01 per share, which was a penny worse than Wall Street was forecasting. But look closely at its Q2 results and you'll see that things are on the cusp of quick improvement.
For example, the company actually generated $13.2 million in operating earnings before one-time costs dragged it to a $0.01 adjusted loss per share. This came on the heels of a 74% reduction in cash costs and a 43% drop in AISC to just $7.19 per silver ounce. To be clear, Great Panther expects the midpoint of its silver-based AISC to be $13 an ounce in 2016, which is down $1 at the midpoint from its prior guidance. Higher metal prices are enticing Great Panther to invest in exploratory projects. But we're still talking about a company with more than $5 in silver margin per ounce at an AISC of $13. Though Wall Street doesn't offer CFPS estimates for Great Panther Silver, it's my belief that in 2017 the company could generate $0.20 to $0.30 in CFPS. On Aug. 25, its stock closed at just $1.24 a share.
If you're a value investor on the prowl for cheap stocks, precious metal mining stocks should be high on your list.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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