After learning that 3 million more Americans filed unemployment claims last week, investors raced to the gold market -- one of the most sought-after safe havens for investments. The latest indication of the devastation on the economy wrought by the COVID-19 outbreak led to the price of gold surpassing $1,740 per ounce -- a level not seen since November 2012.
With the commodity trading at a multi-year high, some investors may believe that it's too late to add gold stocks to their portfolios; however, there are plenty of prognosticators predicting that the yellow stuff will continue to rise, as the COVID-19 outbreak continues with no end in sight. Therefore, investors interested in the metal would be well-served to consider several compelling options right now: Agnico Eagle Mines (AEM -1.11%), Newmont Corporation (NEM -0.68%), and Royal Gold (RGLD 0.26%).
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Soar with this senior gold-mining company
Since its founding in 1957 as a Canadian company focused on silver, nickel, and cobalt mining, Agnico Eagle has grown into a global leader in gold mining. Although it was forced to reduce operations at several sites in Q1 2020 due to COVID-19, Agnico Eagle reported gold production of about 411,366 ounces, a 3.3% year-over-year increase. Reporting $163 million in cash from operations for Q1, the company also glittered in terms of cash flow, achieving a 9% increase over the $149 million it reported during the same period last year.
Because of the capital-intensive nature of developing projects, mining companies often rely extensively on leverage to advance their projects. In the case of Agnico Eagle, however, management has successfully maintained the company's financial health. As of the end of Q1 2020, the company had a net debt-to-earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of 1.1. Furthermore, the company reduced its debt even further in April, helping it to earn an investment grade rating, with Fitch assigning a credit rating of BBB and a stable outlook.
Investors can expect a glittering second half of 2020 as management noted in its Q1 earnings presentation that it "expects to generate significant free cash flow" due to the high price of gold and weaker local currencies. This will afford the company the ability to meet its goals of reducing its debt even further and continuing to reward shareholders by way of the dividend -- one of the higher-yielding dividends among gold mining companies.
Bank on the big dog
The largest publicly traded gold-mining company by market cap, Newmont Corporation will particularly appeal to ESG investors. Last September, for example, Newmont was ranked as the top global gold-mining company on the Dow Jones Sustainability World Index for ESG performance for the fifth consecutive year. Investors with a more conservative bent, meanwhile, will be attracted to Newmont and the broad diversity in its asset portfolio. With operations spanning Australia, Africa, North America, and South America, the risk of having to suspend operations due to restrictions imposed by local jurisdictions is mitigated.
Producing 1.5 million ounces of gold in Q1, Newmont Corporation announced a strong start to 2020 despite the challenges presented by the COVID-19. In addition to reporting a 63% year-over-year increase in adjusted EBITDA, Newmont increased its cash flow, generating $611 million in free cash flow -- a 75% increase over that which it reported in Q1 2019. And with the price of gold rising considerably from the first quarter through the second, management foresees further increases in its free cash flow growth.
Newmont will also glimmer in the eyes of dividend-focused investors. The company recently raised the quarterly dividend to $0.25 per share, representing a 79% increase over that which it paid in Q1 2019.
The royal road to gold
While mining companies are an obvious choice for gold investors, they're hardly the only choice. Assisting mining companies in developing projects by providing upfront capital, and in return receiving a percentage of the asset's mineral production, or the right to purchase metals at a preset price, royalty and streaming companies like Royal Gold represent another viable choice for gold investors. By providing capital as a specialized financier, Royal Gold is not subject to the risks of these capital-intensive projects like the mining companies developing them.
Amid the difficulties stemming from COVID-19, Royal Gold turned in an all-time best performance last quarter, reporting a company record for quarterly revenue: $136.4 million. Looking to the balance sheet, Royal Gold paid off $30 million in debt last quarter, and it now has a conservative net debt-to-EBITDA ratio of 0.3.
Often, the movements in gold-related stocks are closely correlated with the movements in the price of gold.
Royal Gold, however, has climbed notably higher than the 38% rise in the price of gold over the past 10 years, suggesting that patient investors may benefit from keeping this royalty and streaming company in their portfolios over the long term.
A last look at these lustrous gold-mining leaders
Trading at 17.6 times operating cash flow, Agnico Eagle may seem a little pricey compared to its five-year average multiple of 14.5, but it still appears to be a bargain considering the 19 times operating cash flow multiple it had in 2019. Newmont also seems richly valued, changing hands at 16.6 times operating cash flow, whereas its five-year average multiple is 8.4. But the high-price tag seems warranted considering the company's industry-leading position, and investors need not suffer misgivings about paying a little more for a quality stock. Likewise, Royal Gold, valued at 26.4 times cash from operations -- higher than its five-year average ratio of 21.5 -- is far from a steal, but to eschew the stock for its valuation seems short-sighted considering the company's history of outperforming the price of gold.
