One thing is clear two months into 2018: It's been a pretty rough go for gold stocks. The early year's market volatility has hit shares of gold mining companies disproportionately hard, while the recent barrage of full-year 2017 earnings announcements from the industry only added to the misery for some miners.
For instance, Barrick Gold (GOLD -1.02%) stock has dropped 11% year to date. While the company reported its fourth consecutive year of declining revenue and second consecutive year of declining operating cash flow, some of that was simply due to downsized operations. After all, it has sold off hundreds of millions of dollars in assets to clean up its balance sheet over the years. Notwithstanding those declining trends, the company delivered solid profitability and more than enough cash flow to fund operations and debt repayments.
The recent slide may have some investors eyeing Barrick Gold stock right now as long-term investment opportunity. Although there's some merit to arguments supporting that thesis, I think investors interested in owning a gold stock would find more success in the next few years with Yamana Gold (AUY).
Image source: Getty Images.
Bucking the trend
Stacking up the near-term outlook for Barrick Gold against that of Yamana Gold might be enough to make the case. The former is entering a period of production decline that will be accompanied by rising all-in sustaining costs (AISCs). The latter is just about to flip the switch at a world-class mine that will boost gold production 18% and silver production 159% from 2017 to 2020 and lower AISCs for years to come.
That's not to say Barrick Gold is completely helpless or a bad investment. The gold leader ended 2016 with $7.9 billion in debt, reduced that to $6.4 billion by the end of 2017, and will drop it to just $5 billion by the end of 2018. The debt reduction effort will greatly reduce debt payments and interest payments in the years ahead, which could allow the business to maintain healthy profits and cash flows even as production wanes. It could even increase its dividend payments once the debt goal is met at year's end.
But that doesn't obscure the painful reality of the company's expected production mix. Barrick Gold has guided for 4.5 million to 5 million ounces of gold production in 2018, which will mark a sizable drop from 5.32 million ounces of production last year. That is expected to drop to an average of 4.2 million to 4.6 million ounces of gold from 2019 to 2022, while AISCs will average $750 ounce to $875 per ounce. Gold production last year was accompanied by AISCs equal to the low end of that range.
Image source: Getty Images.
Again, none of that may be a complete deal breaker, but the near-term outlook for Barrick Gold doesn't compare favorably to what's expected at Yamana Gold. The company, which, to be fair, has been among the worst gold stocks in the past decade, met or obliterated its full-year 2017 production guidance for its three major metals -- and it updated guidance twice over the year. More importantly, it has some of the best growth prospects in the industry. It's all attributable to having the massive Cerro Moro mine come online in 2018 and ramp up through 2020.
Consider Yamana Gold's most recent three-year production outlook:
|
Year |
Gold Production (oz.) |
Silver Production (oz.) |
Copper Production (million lbs.) |
|---|---|---|---|
|
2017 (Actual) |
828,264 |
5,004,761 |
127.3 |
|
2018 (Guidance) |
900,000 |
8,150,000 |
120 |
|
2019 (Guidance) |
940,000 |
10,400,000 |
120 |
|
2020 (Guidance) |
970,000 |
12,950,000 |
120 |
Data source: Yamana Gold.
Cerro Moro also will sport the second-lowest AISCs for gold production and lowest AISCs for silver production among the company's mines. And since it will have such a major impact on total production, the low-cost mine will significantly lower companywide production costs.
If Yamana Gold delivers on its production potential and avoids delays or significant downtime during ramp-up in the next several years, then it should easily enjoy the best growth prospects in the industry. It won't come close to matching the total output of its $15 billion peer Barrick Gold, but Wall Street would have to reward the business for delivering epic growth from 2018 to 2020.
Worth a closer look, but...
It's pretty difficult to argue against Yamana Gold's potential in the near term. The company is skirting the trend of declining production and rising costs that has ensnared so many of its peers. Unfortunately for them, the worst isn't over yet. That's why Barrick Gold has worked to downsize its portfolio, unload less favorable assets, and clean up its balance sheet so that it's better prepared to live with the new reality that's dawning.
All that said, it's important for investors to remember that gold stocks have historically underperformed the S&P 500 over almost every comparison period. While there's a solid case to be made that Yamana Gold could prove an exception to the rule in the years ahead, any position in the company would require a little more babysitting than others in your portfolio.
