Gold and silver mining stocks aren't often thought of as great long-term investments, but since the beginning of 2016, they've left the broader market in the dust.
Following a roughly $200-per-ounce advance in spot gold over the past year and a half, the VanEck Vectors Gold Miners ETF has risen by 61%, which is nearly triple the 21% return of the broader S&P 500. The Global X Silver Miners ETF has been even better, returning 83% over the same time frame.
Despite higher interest rates in the U.S., which usually spells trouble for physical gold and silver since they offer no guaranteed income or yield, precious metals have found plenty of other catalysts to latch onto. Some examples include the uncertainty created by the Trump presidency and the impending British exit from the European Union, hints of inflation in the U.S. (inflation usually counteracts the negativity accompanying rising interest rates), and a steady uptick in precious-metal demand coupled with relatively minimal supply growth.
The cheapest gold and silver stocks
Yet, despite their outperformance, a small handful of gold and silver stocks still appear remarkably undervalued. But they aren't undervalued by the traditional price-to-earnings metric. I much prefer to look at the price-to-cash flow per share metric for mining companies. Since mining companies rely on their cash flow to maintain and expand existing mines, as well as fund exploration, it provides, in my opinion, a far more accurate valuation measure for precious-metal miners.
In particular, I prefer to look at future cash flow per share (i.e., what it's expected to generate in CFPS next year). Mining companies often trade right around 10 times their future cash flow per share. However, three precious-metal stocks are valued well below those levels, making them potentially the cheapest gold and silver stocks on the planet.
Possibly the cheapest mining company on the planet right now is Yamana Gold (AUY), a gold and silver producer with properties throughout North and South America. On the surface, Yamana Gold may not look all that special. It fell $0.03 per share shy of estimates during the first quarter, its gold and silver production dropped considerably year over year, and its consolidated all-in sustaining cost (AISC) guidance for the remainder of 2017 of $890-$910 per gold ounce is roughly middle of the pack for the gold industry.
But it's not about 2017. It's about 2018 and beyond with Yamana Gold.
The reason Yamana isn't turning much in the way of profits today is because it's working to bring a number of developmental properties on line in 2018 and 2019, which should reignite production growth, lower costs, and allow the company to make some significant headway on reducing its nearly $1.7 billion in debt ($1.47 billion in net debt).
Next year, assuming everything stays on track, Yamana should bring its Cerro Moro and C1 Santa Luz mines on line. Cerro Moro is expected to produce 150,000 ounces of gold and 7.2 million ounces of silver annually over the first three years, while the newly recommissioned C1 Santa Luz is capable of producing 114,000 ounces of gold, on average, over its 10-year mine life. The Suruca development within the Chapada mine rounds things out. It's expected to begin producing 45,000 to 60,000 ounces of gold annually by 2019 for a period of four to five years. Considering that Yamana's forecast calls for 940,000 ounces of gold production this year, the company could boost its gold output by 35% to 40% over the next two years by bringing these new mines on line and modestly boosting yield at existing mines.
Despite this, Yamana is valued at less than four times next year's CFPS. That seems extraordinarily cheap for such a quick-growing gold and silver stock.
Another exceptionally cheap mining stock that gravitates a bit more toward silver production is Coeur Mining (CDE -2.80%). Like Yamana, it has a few figures that might turn off investors who are focused on traditional fundamentals instead of cash flow. For instance, Coeur Mining has whiffed pretty badly on Wall Street's earnings-per-share estimates in each of the past two quarters, and its AISC per silver ounce until recently had been among the highest for silver miners.
But there's a very good reason for this: Coeur Mining has been transforming its business for the better.
For as long as I can recall, Coeur Mining has used both open pit and underground mining to pad its top- and bottom-line results. Open-pit mining is significantly cheaper to commence, but the yields are much lower, leading to potentially higher long-term costs. Coeur's management made the decision recently to move entirely to underground mining. This meant significant up-front capital costs, which is why its AISC has been so much higher than the industry average in recent quarters; however it should result in higher ore-grade, improved production and substantially lower long-term costs.
We're already beginning to see some of the fruits of Coeur's hard work paying off. Coeur Mining anticipates that its underground expansion at Palmarejo, Mexico, will yield a 50% increase in production this year. Not only have the tons milled at Palmarejo in the first quarter grown by nearly 50% year over year, but average gold grade per ton is up by more than 20% since it's moved entirely underground. That's a strong sign of efficiency. Coeur also expects expansion efforts at Kensington, Alaska, and Rochester, Nevada, to pay off in the near term as well.
Even with all of this upcoming growth, Coeur Mining is valued at less than six times next year's CFPS. That's remarkably inexpensive.
Last but not least, Kinross Gold (KGC 0.62%), which operates gold mines in North and South America, as well as Africa, looks awfully cheap. And like the two mining companies we've discussed before it, Kinross looks to have its drawbacks.
The biggest blemish here was its 2010 acquisition of Red Back Mining for north of $7 billion. This acquisition allowed Kinross access to the highly touted Tasiast mine in Mauritania, but the purchase price turned out to be far too high. With gold suffering through a multiyear downtrend following the acquisition, Kinross wrote off about $5.6 billion in value from its purchase price. However, time may be ready to heal those purchase price wounds.
Kinross made the decision in March 2016 to finally move forward with expansion at its Tasiast mine. The phase one expansion was expected to cost around $728 million, and according to management it's remained on time and budget. When full commercial production commences in the second quarter of next year, Tasiast will be producing around 400,000 ounces of gold annually, up from around 250,000 gold ounces annually now.
And Kinross isn't finished -- a secondary expansion may be coming. An expansion feasibility study is due out in the third quarter of this year, which will help Kinross' management team make a decision on whether or not to boost throughput to 30,000 tons per day from 12,000 tons per day. If Kinross moves forward with this next step, capital costs would be slightly more than double what they were in phase one, but production would grow to approximately 777,000 ounces of gold annually at an estimated $665 AISC. That's insane production growth at a very high margin.
All the while, production at Bald Mountain is on track to double year over year, while Round Mountain and Fort Knox in the Americas have the potential to deliver modest production growth and lower AISC.
In spite of the potential that Tasiast brings to the table, Kinross Gold is valued at only five times its future CFPS. That's certainly cheap enough to merit a closer look from investors.