After gold's historic run in 2020 -- one that saw its price surpass $2,000 per ounce in August -- the price of gold has steadily declined since the start of 2021. In January, the average price of the yellow metal was $1,867 per ounce; however, the average prices have since tumbled to $1,808 and $1,718 in February and March, respectively.
While the declining price of gold may suggest to some investors that it would be best to eschew the precious metal, smart investors recognize the opposite sentiment may be the more savvy one: The declining price of gold presents a great opportunity for long-term investors, who recognize that gold will likely rebound. With this approach in mind, let's dig into some of the most compelling opportunities for gold investment at the moment: Newmont (NEM 0.67%), Pretium Resources (PVG), and Royal Gold (RGLD 1.34%).
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A dividend opportunity that's hardly fool's gold
Unlike REITs and utilities -- stocks that are often front and center on income investors' radars -- gold stocks rarely gain the interest of those looking to pick up some yield. However, Newmont, the largest publicly traded gold mining company based on market cap, is bucking that trend. Currently, the stock offers investors an eye-popping 3.6% forward dividend yield -- one of the highest yields available to gold-focused investors. Besides the high yield, it's management's approach to the dividend that's also noteworthy.
The company has set a policy that provides for anannualized $1.00 per share base dividend with the price of gold above $1,200 per ounce. In addition to the base, Newmont targets returning 40% to 60% of free cash flow to investors through the dividend. For example, should the price of gold average $1,800 per ounce, Newmont projects an annualized dividend of $2.20 to $2.80 per share, and if the price of gold rose to $2,100 per share, the dividend would jump to $2.80 to $3.70 per share.
Although skeptics may scoff at the company's dividend policy, the company is on solid footing regarding its financials, which will help it to maintain the high degree to which it's rewarding shareholders. Newmont ended 2020 having generated record free cash flow of $3.6 billion, and it's taking a conservative approach to leverage: Newmont currently has a net debt-to-EBITDA ratio of 0.2.
Digging for gold in the Great White North
Unlike Newmont, which has a massive portfolio of global assets, Pretium Resources owns and operates only one asset: Brucejack, located in northwestern British Columbia. Producing nearly 348,000 gold ounces in 2020, Pretium Resources had a lot to celebrate last year thanks to its gold-mining operations at Brucejack.
For one, Pretium Resources generated a record $369 million in free cash flow -- capital which management used to help shore up its balance sheet, reducing its debt by $227 million. Consequently, Pretium ended 2020 with a net debt-to-EBITDA ratio of 0.5. Shifting the focus from last year to this year, management forecasts (using a gold estimate of $1,700 per ounce) free cash flow of about $145 million for2021.
Currently, investors can find shares of Pretium Resources on the discount rack. The stock is trading at 6.5 times operating cash flow, representing a discount to its 2019 and 2020 multiples of 10.2 and 7.3, respectively. Additionally, shares are changing hands at about 10.6 times forward earnings, notably lower than its five-year average ratio of32.
Go with the stream -- the gold stream, that is
If investing in a gold-mining company doesn't quench your thirst for a gold stock, Royal Gold, a royalty and streaming company, may be the right choice. Whereas companies like Newmont and Pretium take on significant risk in operating their gold assets, Royal Gold acts more like a specialized financier, providing capital to mining companies to finance their capital-intensive projects.
In exchange, Royal Gold receives either a royalty, a right to a percentage of the mining company's revenue or metals produced from a project, or a stream, the right to purchase the produced metal from a mining project at a preset price.
It's not only the company's business model that represents a lower degree of risk than a mining company. Royal Gold has exposure to a variety of other minerals, mitigating the risk of a steep downturn in the price of gold. In 2020, for example, gold accounted for 79% of the company's revenue.
The company's portfolio represents another way in which it shines. While mining companies must constantly strive to replenish their depleted assets, Royal Gold has a portfolio that ensures growth. Of the 189 properties in its portfolio, Royal Gold has 41 mineral-producing assets and 148 assets in varying phases of development.
Think the regal route is worth taking? Now's a great time. Shares of Royal Gold are trading hands at 18.8 times operating cash flow, representing a discount to its five-year average multiple of 22.4.
The glittering takeaway for gold-minded investors
With gold prices declining so precipitously lately, it may seem that it's not the right time to invest in the yellow stuff. Smart investors know that, often, the opposite rings true. For those looking to add some sheen to their holdings but who are similarly sensitive to risk, Newmont is a great choice -- especially with its attractive dividend. Growth investors, on the other hand, may be more interested in Pretium Resources, while those looking for an alternative would be well-suited to consider Royal Gold.
