For the past three months, investors have been taken for quite the ride. While stock market corrections are fairly common and bear markets inevitable, the current bear market is unlike anything we've ever seen before.
The coronavirus disease 2019 (COVID-19) pandemic has cost more than 39 million Americans their jobs, based on initial jobless claims filed over the previous nine weeks, and at one point, it erased 34% of the value of the S&P 500 in just 33 calendar days. It's the fastest bear-market correction Wall Street has ever witnessed.
In a broader sense, few sectors and industries have been spared from this weakness. But amid this market malaise, one industry is shining brighter than ever: gold mining.
As an investor of 21 years, I've probably followed no industry more closely than gold mining -- and without question, gold stocks have never been more compelling than they are right now.
Why should you consider gold stocks as an investment for your own portfolio? It really boils down to the blossoming macro outlook for the shiny yellow metal and the improved balance sheets and operating efficiencies of certain gold-mining companies.
Gold's lustrous outlook
The first ingredient needed for gold stocks to shine is a healthy rise in the underlying metal they produce and sell. In recent years, that's not been a problem. The per-ounce price for physical gold has risen by $460 over the past year and around $670 an ounce since bottoming out in early 2016. Recently, the shiny yellow metal closed at a seven-year high, well above $1,700 an ounce.
One reason gold has been virtually unstoppable of late is because global bond yields are plunging. There are trillions of dollars in negative-yielding bonds worldwide, with plenty of other positive-yielding bonds liable to produce real-money losses once inflation is factored in. With investors having fewer opportunities to generate guaranteed real income, gold is suddenly being viewed as the logical store of value for the foreseeable future.
Another reason gold has taken off is the exceptionally dovish policy of the U.S. and global central banks. Earlier this year, the Federal Reserve lowered its federal funds target rate back to a record-tying low of 0% to 0.25% to encourage lending. The U.S. central bank also promised an unlimited amount of quantitative easing in an effort to assuage market fears. With the Fed throwing the kitchen sink at the market, the U.S. dollar will likely come under pressure -- and since the dollar and gold usually move in opposite directions, this is a green flag for gold to take off.
We've even witnessed supply shortages manifest for physical gold in recent months. Supply-and-demand economics would suggest that if demand outweighs the supply of a product, the price will increase until such time as demand tapers.
Gold-mining stock balance sheets are much improved
However, buying physical gold isn't the smartest way to take advantage of rising spot prices. Instead, buying into gold-mining stocks, which may offer a dividend and are able to leverage a rise in the underlying price of gold, is the best move you can make.
Between 2010 and 2012, gold-mining companies piled on debt, ramped up exploration, and advanced a vast majority of their projects. With gold rocketing from $800 an ounce to as much as $1,900 an ounce between 2009 and 2011 and the precious metal riding (at the time) a more-than-decade-long win streak, miners probably felt invincible. Then gold proceeded to lose more than $800 an ounce over the course of the next four years, and overleveraged companies paid the price.
But over the past five years, we've seen a real resurgence of common sense in the mining industry. Companies have been diligently reducing their debt loads, all while advancing only the most profitable projects. In many respects, all-in sustaining costs (AISC) have declined for gold stocks, while financial flexibility has improved.
Take industry giant Barrick Gold (NYSE:ABX) as a perfect example. This is a company that, as of the end of 2014, had approximately $13 billion in total debt. However, following multiple asset sales, the Randgold acquisition, and utilizing its operating cash flow to pay down debt, Barrick Gold today has around $5.2 billion in total debt and less than $1.9 billion in net debt, and it generated $3.2 billion in operating cash flow over the trailing-12-month period. Barrick's balance sheet went from being a serious liability to no longer being a concern.
Barrick Gold's story is very similar to what you'll find throughout much of the industry.
These gold stocks have more room to run
In theory, all gold stocks should benefit from rising gold prices. But not all gold stocks are created equal. Some have juicier margins or more attractive balance sheets or are phenomenal values relative to their peers.
One of the more obvious beneficiaries is royalty and streaming company Wheaton Precious Metals (NYSE: WPM). Wheaton provides cash to mining companies to aid in the build-out of a mine and in return receives a percentage of precious-metal output at a below-market cost. Wheaton then sells what it receives at market rates, thereby banking the difference as profit. This makes royalty and streaming companies the most sensitive to fluctuations in the underlying price of gold. Inclusive of all metals (gold, silver, and palladium), Wheaton's average cash cost was just $403 per gold equivalent ounce (GEO) in its most recent quarter, leading to a cash operating margin of $1,131 per GEO.
In terms of balance sheet, perhaps no company is as pristine as Kirkland Lake Gold (NYSE:KL). It ended the first quarter with $530.9 million in cash and no debt. What's more, Kirkland Lake spent $329.8 million to repurchase more than 9.7 million shares of stock during the quarter and doubled its quarterly dividend to $0.125. The recent acquisition of the Detour mine will boost Kirkland's 2020 production by around 50%, with the company's first-quarter AISC of $776 per ounce sold indicating a nearly $1,000 cash margin over current spot prices.
And if value is your thing, SSR Mining (NASDAQ:SSRM) is the gold stock to consider. SSR Mining has outlined a plan to execute 30% production growth out of its Marigold mine between 2018 and 2022 and has generated record output from the Canadian Seabee mine every year since its 2016 acquisition. Recently, SSR Mining and Alacer Gold announced their intention to merge, which'll bring Alacer's high-growth Copler gold mine into the fold. All told, we're talking about a company that has well over $200 million in net cash that's valued at less than 8 times next year's cash flow.
The point is, things have never looked this good for gold stocks.