Illustrating once again how investors will often turn to gold when markets turn volatile, the price of gold has risen nearly 6% since the beginning of the year, while the S&P 500 has plummeted 23%. And it's fair to say the volatility is far from behind us. Record numbers of Americans filing first-time claims for unemployment benefits; the COVID-19 pandemic continuing to sweep across the nation; and companies facing unprecedented headwinds are just a few of the factors that will create even more volatility in the marketplace.
Investors who recognize the choppy waters ahead may find some solace in adding some shine to their portfolios with investments in the yellow metal. Fortunately for them, there are some compelling opportunities from which they can choose -- opportunities like Barrick Gold Corporation (NYSE:ABX), Franco-Nevada Corporation (NYSE:FNV), and Kirkland Lake Gold (NYSE:KL).
Go gold with this smooth operator
Operating gold and copper projects in 13 countries, Barrick Gold has a portfolio of assets spread across North and South America, Africa, Papua New Guinea, and Saudi Arabia. The geographic diversity in its assets portfolio is especially advantageous now as it mitigates the risk of any one jurisdiction forcing the company to suspend operations at a given asset. Currently, Barrick hasn't placed any assets on care and maintenance or reduced operations, but it has stated that "All non-essential business travel has been suspended, and non-essential projects have been curtailed." In terms of mineral production, Barrick produced 5.5 million ounces of gold in 2019, making it the second-largest gold mining company after Newmont Corporation (NYSE:NEM). But don't let the fact that it didn't produce the biggest gold pile last year fool you; Barrick Gold glitters more brightly than Newmont in other ways.
For one, Barrick generated a wider gold margin last year,reporting all-in sustaining costs (AISC) of $894 per gold ounce, whereas Newmontreported AISC of $966 per gold ounce. This helped Barrick generate $8.8 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) at an EBITDA margin of 91%, compared to Newmont which reported EBITDA of $6 billion at an EBITDA margin of 61%, according to Morningstar. Should Barrick reduce operations at its assets due to COVID-19, however, the company's EBITDA in 2020 could be significantly impacted.
Another of Barrick's alluring qualities is management's commitment to maintaining the company's financial health. Barrick ended 2019 with $2.2 billionin net debt, a 47% reduction compared to the end of 2018. As a result, Barrick is assuming a conservative approach to leverage, as it now has a net debt-to-EBITDA ratio of 0.25. As EBITDA may decline due to the company limiting operations, though, this ratio may rise in 2020.
A gold island in the stream
As a royalty and streaming company, Franco-Nevada Corporation presents investors with the opportunity to gain gold exposure from a different angle. Rather than dig the yellow stuff out of the ground itself, Franco-Nevada assists mining companies by providing upfront capital for the development of projects, and in return receives a percentage of the asset's mineral production, or the right to purchase metals at a preset price. In doing so, Franco-Nevada avoids the risks associated with the development of these capital-intensive projects.
Proclaiming itself "the gold investment that works," Franco-Nevada's portfolio of assets provides the company with exposure to silver, platinum group metals, and oil and gas, but it's gold that accounted for the lion's share of its revenue in2019: 65% of overall sales, or approximately $549 million. And gold will figure prominently in the company's financials for the foreseeable future. With 35 projects in the advanced development phase and 202 projects in the exploration phase, Franco-Nevada forecasts that its portfolio will grow from 516,438 gold equivalent ounces (GEOs) in 2019 to 595,000 GEOs in 2024. As of April 7, the company reported that 11 of the 52 "smaller cash-flowing assets" in its portfolio have limited operations. Furthermore, the company stated that "The impact to Franco-Nevada of temporarily reduced or curtailed production is essentially limited to a deferral of revenue."
Like Barrick, Franco-Nevada has also made a concerted effort to fortify its financial position. Over the past three months, the company has completely paid down its debt, resulting in a net cash position of $80 million.
Take a gander at this gold-growth option
For investors seeking more conservative options, Barrick and Franco-Nevada are ideal candidates. Those who are more willing to take on risk, however, will find that Kirkland Lake is a compelling consideration, although the risk is mitigated by its net cash position of $690 millionas of the end of 2019. Last year, the company reported annual gold production of 974,615 ounces at AISC of $564 per gold ounce -- company records for both metrics. Like many companies, Kirkland Lake has been impacted by the novel coronavirus. For example, it has suspended operations at the Holt Complex and reduced operations at the Macassa Mine. Consequently, Kirkland Lake has withdrawn 2020 guidance.
In 2019, shareholders had a lot to celebrate when reviewing the income and cash-flow statements. Besides reporting EBITDA of more than $969 million, an 82% year-over-yearincrease, Kirkland Lake generated operational cash flow of more than $919 million, which represents a 68% increase over the $549 million it reported in 2018.
With its recent acquisition of Detour Gold, which management characterized as a "major milestone for our company," Kirkland Lake added 14.8 million ounces of open-pit mineral reserves to its resources. As a result, the company greatly increased its mineral reserve. Whereas Kirkland Lake had 5.7 million gold ounces in proven and probable reserves at the end of 2018, it reported 20.5 million gold ounces at the end of 2019.
A last look at these lustrous opportunities
While these companies all expect to travel down a yellow brick road over the next few years, it's critical to keep in mind that the mining industry is not exempt from the devastation wrought by COVID-19. So investors should not be surprised if companies must revise gold forecasts as they face the potential suspension of operations at their projects. Nonetheless, Barrick Gold, Franco-Nevada, and Kirkland Lake represent ideal gold-focused options, and they're all trading at reasonable valuations.
Currently, Barrick is trading at 12.4 times operating cash flow. Although this is a premium to its five-year average multiple of 7.8, paying a little more for an industry stalwart is worthwhile, and the valuation is slightly below the average multiple of 12.6, which it traded at in 2019. Similarly, shares of Franco-Nevada are changing hands at 32.9 times operational cash flow, a premium to the five-year average of 30.4 and a discount to the average 36.4 multiple they had in 2019. Arguably, Kirkland Lake is the most attractive valuation with a price-to-operational cash flow ratio of 7.6, a discount to its five-year average ratio of 9.7.