Whether it's due to fear of increased coronavirus lockdowns or concern about political volatility in Washington shaking the markets, some investors have increasingly been turning to safe-haven investments like gold. Others have focused on copper stocks as interest in infrastructure projects in the U.S. and China has increased.
Pretium Resources: Go for the gold star
While the price of gold has skyrocketed 24% year to date, shares of Pretium Resources have only inched about 5% higher as of this writing as investors have feared that COVID-19 could hurt the operations at Brucejack in British Columbia, Canada, the company's sole mineral-producing asset. Pretium's stock currently trades at about 7.4 times operating cash flow.
Since the company only began to generate positive cash flow in 2017, it's impossible to compare its current valuation to a five year-average multiple. But it's worth noting that the stock trades at a discount to its 10.2 valuation for 2019.
Although investors' concerns have stifled the stock's rise this year, Pretium seems poised to deliver on its 2020 guidance. After producing roughly 259,000 gold ounces in the first three quarters of the year, management is targeting production of about 86,000 ounces in Q4, positioning the company to achieve 2020 guidance of 325,000 to 365,000 ounces, comparable to the gold production of 354,000 ounces it achieved in 2019. That would certainly be a positive considering the challenges which COVID-19 have brought, but it would mean little if it came at an exorbitant cost.
This doesn't appear to be the case, though. Through the first three quarters of 2020, Pretium reported all-in sustaining costs (AISC) of $971 per gold ounce, and it's confident that it will ultimately achieve its 2020 AISC forecast of $960 to $1,120. For some context, Eldorado Gold and Equinox Gold, two peers based on market cap, forecast 2020 AISC per gold ounce of $900 and $1,000, respectively.
Similarly, Pretium has maintained its free cash flow (FCF) outlook for 2020. After generating FCF of $191 million in the first nine months of 2020, the company is confident that it will achieve its full-year FCF forecast: $205 million to $275 million. Should the company achieve the midpoint of its guidance, it would represent an impressive 30% gain over the $184 million that it reported in FCF for 2019.
Royal Gold: A mining stock fit for a monarch
For investors seeking exposure to mining stocks but who wish to mitigate the risk associated with investment in an individual mining company, Royal Gold, which, has ties to numerous mining companies, represents an excellent option. Unlike mining companies, Royal Gold is a royalty and streaming company.
Developing mining projects is capital-intensive, so mining companies don't always choose to pursue that course alone. Oftentimes, they turn to royalty and streaming companies, which provide up-front capital for the development of projects in exchange for the right to purchase the mined metal at a pre-set price or to receive a percentage of mineral production. By doing this, Royal Gold avoids the associated risks of developing individual projects while gaining the opportunity to prosper from their success.
Investing in Royal Gold mitigates the risk of investing in a single company and offers diversity beyond one metal. While gold accounted for 79% of the company's 2020 revenue (its fiscal year ends in June), silver and copper each contributed 9% to the company's top line.
To address the strength of Royal Gold's portfolio and allay concerns over the pandemic, CEO William Heissenbuttel said on the company's fourth-quarter conference call in August: "In addition to a portfolio of 187 assets, 41 of which produced revenue of almost $500 million, our cash overhead remained low, representing about 4% of revenue. It is this combination of revenue diversification and high cash margins that should allow us to withstand the potential uncertainty of future COVID-19 impacts."
Royal Gold achieved annual records for revenue, operating cash flow, and net income in its fiscal 2020 despite the challenges of COVID-19.
Smashing analysts' estimate of $0.86 in first-quarter earnings per share, Royal Gold reported EPS of $1.63 in early November. Nonetheless, the stock is still on the discount rack. Whereas its five-year average operating cash flow multiple is 22.2, shares now trade with that multiple at 19.9.
Southern Copper: If gold isn't your choice
If you're uninterested in precious metals, consider Southern Copper, a leading global copper producer. Over the past few months, the price of copper has been steadily gaining after plummeting in the spring, and on Nov. 20, it traded at its highest point over the past two years as demand grows in China.
In addition, news of COVID-19 vaccines and the promise of a return to normal that that sparks and messaging from President-elect Joe Biden supporting infrastructure projects have also spurred demand. And with shares of Southern Copper trading at 19.7 times operating cash flow, a bargain considering the five-year average multiple of 20.3, investors can pick up the stock at a discount.
Dividend investors may also be attracted to Southern Copper. The company announced in late October a dividend raise from $0.40 to $0.50 per share, putting the stock's forward dividend yield at 3.5%. Although this applied to shareholders of record as of Nov. 11, the recovering price of copper suggests that the company may report a strong fourth quarter, leaving it well positioned to maintain the $0.50 payout. And it has generated FCF of $1.7 billion over the past 12 months, more than the $1.2 billion that it generated in 2019.
Besides the Tia Maria project, located in Peru, which is estimated to achieve annual copper production of 120,000 metric tons when it commences operations, Southern Copper has a variety of other projects in its pipeline, including El Arco in Mexico and Los Chancas in Peru.
Lustrous last words
With some analysts forecasting gold to trade as high as $2,300 per ounce in 2021, Pretium Resources and Royal Gold are especially interesting at the moment. But even if gold maintains its current level, both stocks are still lustrous opportunities. Meanwhile, Southern Copper presents investors interested in base metals with an equally compelling option given how well it's been doing and the potential for increased demand.