As unemployment continues to rise at unprecedented levels, investors are worried about how the economy will respond to the various social distancing measures that local and state leaders are implementing -- as well as those instituted by nations around the globe. It comes as little shock, therefore, that the price of gold has risen more than 8% year to date as investors seek the comfort of one of the most popular safe-haven investments.
With earnings season upon us, wild vicissitudes in the S&P 500 will surely continue as companies reveal the harmful impacts of the coronavirus on their businesses, and with them, the price of the yellow stuff will also likely rise. For those who are also seeking the comfort of gold, forget hoarding gold bars and consider stocks such as Alamos Gold (AGI 2.51%), Pretium Resources (PVG), and Yamana Gold (AUY).
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Go for the gold with Alamos
Formed in 2003, Alamos Gold operates three gold mines in North America; in addition, it has several projects in development in Turkey. Unlike many mining companies that rely extensively on debt to finance their development and exploration projects, Alamos only had $100 million in debt as of the end of Q1 2020. And when you consider the $215 million the company had in cash, it's clear the company deserves a gold star for its solid balance sheet.
Although Alamos is facing setbacks due to COVID-19, they're hardly disastrous. For one, Alamos had to suspend operations at its Canadian asset, Island Gold, on March 25, but management expects to begin a "phased restart" of operations in early May. At the Mulatos mine, located in Mexico, the company had to reduce operations in April; however, it continues to recover gold that had been stacked on the leach pad in Q1. And meanwhile, operations at Young-Davidson haven't been significantly reduced, though the completion of an expansion project is now expected to be delayed by several weeks.
Due to the uncertainty surround the coronavirus, Alamos withdrew its 2020 guidance, but management remains confident that it will begin to generate free cash flow in the second half of the year. Trading at 12 times operating cash flow, shares of Alamos seem inexpensive when compared to their five-year average multiple of 14.6, offering investors a quality gold stock at a bargain price.
Things at Brucejack remain on track
An intermediate producer, Pretium Resources is the sole operator of the Brucejack mine, located in British Columbia. Having implemented various safety protocols, management recently reported during its Q1 2020 earnings presentation that although capital projects and expansion drilling programs have been suspended, mining operations remain ongoing at Brucejack. In fact, the company announced a strong start to the year.
Image source: Pretium Resources.
Reporting gold production of 82,888 ounces at all-in sustaining costs (AISC) of $996 per gold ounce, management believes the company is on track to achieve both mineral production and AISC forecasts for 2020. Moreover, management expects to achieve its 2020 free cash flow forecast of $100 million to $170 million. Considering the fact that management based this forecast on a gold price of $1,450 per ounce, and the price of gold has averaged $1,608 year to date, it seems possible that the company's 2020 free cash flow exceeds management's initial forecast.
Since Pretium Resources commenced commercial operations at Brucejack in July 2017, investors can't use a five-year average multiple on the stock to assess its valuation. Nonetheless, it's currently trading at 7 times operating cash flow, a discount to the 8.3 and 10.2 multiples it had in 2018 and 2019, respectively.
Declining debt and dedication to the dividend
Operating one mine in Canada and four in South America, Yamana Gold was forced to temporarily suspend mining activities on two continents due to COVID-19; however, management has reported that operations are ramping back up at both Canadian Malarctic in Quebec and Cerro Moro in Argentina.
And despite these challenges, Yamana reported a lustrous start to 2020. With Jacobina, El Penon, and Minera Florida all exceeding expectations, Yamana reported gold production of 192,238 ounces in Q1 2020. This contributed to Yamana reporting $45 million in net earnings for the quarter -- notably better than the $4.1 million net loss it reported during the same period last year. But it wasn't only on the income statement where Yamana sparkled. The company generated net free cash flow of $91.1 million in the quarter, 14% higher than that which the company has averaged over the past four quarters.
Undeterred by the unforeseen challenges Yamana faced in the first quarter, the company continued to strengthen its financial health, reducing its net debt by $20 million, as it makes further progress toward deleveraging and achieving a net debt-to-EBITDA ratio below 1. The company's financial achievements in Q1 recently inspired management to raise the quarterly dividend 25% to $0.0625 per share, representing the third dividend increase in the past year for a cumulative total increase of 213%.
While shares are trading at 8.9 times operating cash flow, higher than the five-year average multiple of 5.7, they're only sightly pricier than the 8.7 multiple they had in 2019, suggesting the stock is still reasonably valued.
One last glance at these golden choices
For investors interested in stocks that provide exposure to gold, trying to find the right names can feel overwhelming considering the vast number of companies that are involved in mining activities. Fortunately, investors need not look much further than Alamos Gold, Pretium Resources, and Yamana Gold for some compelling opportunities -- three companies that generate strong cash flow.
While Alamos Gold and Pretium Resources sport the more attractive price tags at the moment, Yamana Gold represents a quality company for which it's well worth paying a little extra.
