Most gold stocks surged upward in 2020 as the coronavirus pandemic led to an unnerving level of uncertainty and volatility in equity markets. Investors seeking safety flocked to gold, driving bullion prices to record highs, which in turn boosted revenues for gold mining companies.
This year, though, that gold rally has come to a grinding halt and shifted into reverse, triggering a sell-off in gold stocks. But that provides new investors with a better opportunity to scoop up shares of promising companies with strong growth potential in cash flows and shareholder returns. Here are three such top gold stocks you might want to consider buying now.
A bigger gold company in the making
Barrick Gold's (GOLD 1.64%) size and scale of operations, and its hunger for growth, make its stock one of the best bets in the gold industry. Barrick's mega-merger with Randgold in 2018 created the world's largest gold mining company until Newmont Mining acquired Goldcorp the following year. Ever since, Barrick's CEO Mark Bristow has been vocal about the need for further consolidation in the gold industry, and his own interest in participating in that consolidation.
In fact, until recently, Barrick was eyeing copper mining giant Freeport McMoRan for its prized Grasberg mine, which is also the world's largest gold-producing mine. Although nothing materialized on that front, it should give investors a glimpse of the kind of growth Barrick is after. And why not? The miner is flush with cash and building a strong balance sheet.
Image source: Getty Images.
In 2020, Barrick earned $2.3 billion in net income and generated record free cash flow of $3.4 billion. Of course, much of the credit for those results is attributable to last year's high gold prices, but the miner also pared down its debt to $5 billion. With cash and equivalents that are about equal to that, Barrick is now a zero-net-debt company with no significant debt maturing before 2033. And in a move to boost investor confidence, Barrick has proposed returning the gains it earned from the sale of non-core assets to shareholders in the form of a dividend worth $0.42 per share, to be distributed in three tranches this year.
There's a lot to like here, which is why the recent double-digit-percentage price drop in Barrick's shares caught my attention.
On track for a record year and a big dividend hike
Franco-Nevada (FNV 0.93%) makes a killing when the price of gold rises. Consider that operations at several of its mines were suspended in 2020, yet Franco-Nevada still generated record revenue of $1 billion in 2020 and earned an operating margin of 33%. Its margins would've been much higher if not for asset impairments.
Franco-Nevada's high-margin business model with zero debt should appeal to investors. The thing is, Franco-Nevada is not a miner -- it's a gold streaming and royalty company. Such companies provide the miners with the upfront funds they need to develop their assets, in return for which they get the right to buy predetermined percentages of the mines' outputs from them at substantial discounts to the metals' spot prices. For example, Franco-Nevada will pay only 20% of the spot price for each ounce of gold and silver it receives from the Condestable mine in Peru under a $165 million streaming deal it struck last year.
Although Franco-Nevada also has interests in oil and natural gas royalties, it is still very much a gold company: In 2020, 91% of its revenue came from gold and gold equivalents. It holds enviable streaming and royalty deals on big mines, including First Quantum's Cobre Panama, Glencore's Antapaccay, and Lundin Mining's Candelaria.
2021 should be a record year, given Franco-Nevada's projected 9% growth at the midpoint in gold equivalent ounces (GEOs) sold. Further, it expects high-single-digit percentage growth in GEOs annually through 2025, driven largely by the ongoing expansion at Cobre Panama. With that, you can also expect higher dividends: The company just announced a 15.4% payout increase, marking its 14th consecutive annual dividend raise. With such compelling fundamentals, I consider Franco-Nevada to be one of the most attractive stocks to buy on dips.
This underrated gold stock deserves more love
Sometimes, it can be difficult to understand just what's driving the market's views of certain stocks. How, for example, can one explain why a gold mining stock tanked by 35% over the past six months when the company has the strongest balance sheet in the industry, generates a gusher of cash, and is expediting exploration to replace its depleting reserves? That's Kirkland Lake Gold's (KL) story in brief, and its price drop offers investors a compelling entry point into a promising gold stock.
Declining production at Kirkland Lake's legendary low-cost Fosterville mine in Australia has been investors' biggest worry. However, that's also why in 2020 Kirkland Lake bought Canada-based Detour Gold, and with it the prized long-life Detour Lake mine, which has significantly expanded its mineral reserves and production.
Data source: Kirkland Lake Gold. Chart by author.
Detour drove Kirkland Lake's costs higher in 2020, but that was only a blip. This year, the company expects production at Detour to rise 32% to 39% and all-in-sustaining cost (AISC) to drop nearly 23% to $900 per ounce. In any case, Kirkland Lake should be able to generate high margins. To elaborate, consider that its AISC shot up from $564 per ounce in 2019 to $800 an ounce in 2020, which was offset by a 26% higher average realized price of gold.
Now, assuming gold drops to Kirkland Lake's 2019 realized price of around $1,400 per ounce and its AISC remains at $800, the miner would still achieve a hefty 40% margin.
The point is, Kirkland Lake is on a strong footing, has no debt, and even increased its dividend twice in 2020, driving the stock's yield to 2.2%. The share price drop appears to have baked in all the pessimism already, so you know what to make of it now.
