Gold is positioned to trend higher supported by macro-economic factors of inflation and possible recession
- High inflation and the possibility of a recession in 2023 underpin the case for gold stocks to buy. High geo-political tensions also add to the positive catalyst for gold upside.
- Newmont Corporation (NEM): Robust cash flows and multi-year production inventory. Strong balance sheet for sustained growth.
- Barrick Gold (GOLD): An attractive all-in-sustaining cost and a strong balance sheet. A healthy reserve replacement ratio ensures a stable reserve and resources base.
- Kinross Gold (KGC): Divestment of Russian assets have lowered the production visibility for 2022 and 2023. Strong liquidity buffer to acquire assets and boost production growth.
- AngloGold Ashanti (AU): Annualized free cash flow potential in excess of $1.0 billion. A strong balance sheet for dividend growth and investment in production upside.
Stubbornly high inflation is possibly the biggest challenge for policymakers for the year and potentially into 2023. Recently released data indicates that inflation has surged to a 40-year high of 8.6%. While the Federal Reserve is pursuing contractionary monetary policy, real interest rates are likely to remain negative for an extended period.
The Fed’s policy committee will end a two-day meeting on Wednesday by raising interest rates by at least 50-basis points.
Another important reason to be bullish on gold stocks is as follows — There is a possibility of a recession in the United States in 2023. If the probability of recession increases in the next few quarters, the central bank might pause on the rate hikes. This is likely to be bullish for the precious metal.
It’s therefore not surprising that gold has remained relatively resilient even with tightening liquidity. Gold is also supported above $1,800 an ounce due to the geo-political risk factor. With some correction from highs, there are attractive gold stocks to buy at current levels.
Overall, I believe that gold can test new highs in the next 12-18 months. Let’s therefore talk about four gold stocks to buy that are positioned to trend higher as cash flows remain robust.
Newmont Corporation (NEM)
From 52-week highs of $82.40, Newmont Corporation (NYSE:NEM) has corrected to current levels of around $65. Current levels seem attractive for accumulation for this 3.28% dividend yield stock.
Newmont has 96 million ounces of gold reserves, which gives the company multi-year production visibility. Further, the company expects to reduce the all-in-sustaining-cost (AISC) to $800 to $900 an ounce over the next few years.
Even if gold trades around $2,000 an ounce, Newmont is positioned to deliver healthy EBITDA margin and cash flows. It’s worth noting that Newmont reported free cash flow of $252 million for Q1 2022. With an annualized FCF potential of $1.0 billion, the company is well positioned to sustain dividends.
Further, the miner reported cash and equivalents of $4.3 billion and net-debt-to-adjusted EBITDAX of 0.3. Therefore, there is ample financial flexibility to invest in growth.
Another important point to note is that Newmont has 91% of assets in the Americas and Australia. Assets in regions with low geo-political risk should add to the valuation premium. NEM stock therefore looks attractive at a forward price-to-earnings-ratio of 20.7.
Barrick Gold (GOLD)
Barrick Gold Corporation (NYSE:GOLD) is another name among gold stocks to buy that trades at attractive valuations.
I like Barrick Gold from a fundamental perspective. The company has a BBB+ credit rating and ample financial flexibility for shareholder value creation.
For Q1 2022, Barrick reported free cash flow of $393 million. Barrick reported an all-in-sustaining cost of $1,164 an ounce for the quarter. With gold above $1,850 an ounce, free cash flow is likely to be healthy. With clear visibility of positive FCF and cash and equivalents of $5.9 billion, the 1.9% dividend is likely to sustain.
It’s also worth noting that the company reported reserve replacement of 165% for Africa and Middle-East assets. A strong balance sheet will enable the company to invest aggressively in exploration. Inorganic growth also seems like a possibility considering the company’s credit profile.
Overall, GOLD stock is attractive at a forward P/E of 18.4. Considering geo-political, inflation and recession factors, the stock is worth holding in the portfolio.
Kinross Gold (KGC)
Among the relatively high-risk gold stocks to buy, I would consider Kinross Gold Corporation (NYSE:KGC) at a forward P/E of 11.5. The stock has been an under-performer. However, there are reasons to believe that a reversal might be on the cards.
In terms of negatives, Kinross divested stakes in Russia and Ghana assets. This has translated into a lower production guidance. For the current year, Kinross has guided for gold production of 2.15 million oz., down from an earlier guidance of 2.65 million oz. Production is expected to gradually increase to 2.3 million oz. by 2023.
This factor seems to be largely discounted in KGC stock. It’s worth noting that Kinross closed Q1 2022 with cash and equivalents of $1.7 billion. The company has the financial flexibility to acquire assets to boost growth. This seems very likely.
Further, Kinross has guided for an all-in-sustaining-cost of $1,150 an ounce. Even with the current production profile, the company is positioned to deliver positive free cash flows through 2023. The financial profile will therefore improve further.
AngloGold Ashanti (AU)
Among the stocks discussed, AngloGold Ashanti Limited (NYSE:AU) trades at the lowest forward P/E ratio of 9.2. If gold remains firm or break-out on the upside, AU stock is also poised for a meaningful rally.
One reason for a relatively subdued valuation is the fact that the company has a higher AISC as compared to peers. However, the AngloGold still reported $268 million in free cash flow for Q1 2022. With an annualized FCF potential in excess of $1.0 billion, the financial flexibility is robust.
As of Q1 2022, the company reported cash and equivalents of $2.5 billion. Further, with a net-debt-to-adjusted-EBITDAX of 0.51, there is ample scope for organic and acquisition driven growth.
In January 2022, the company announced the acquisition of Corvus Gold. Given the financial flexibility, further acquisition is likely to boost production growth. As of December 2021, the company reported mineral resources of 123.2 million oz., which provides production visibility.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.