Banyan Gold Corp. (TSXV: BYN, OTCQB: BYAGF)
The New Yukon Gold Rush
Benefiting from the capital rotation caused by the American tech stock plunge, gold stock prices have recently broken higher. The gold mining ETF, VanEck Gold Miners ETF (GDX), has risen 10% so far this month, though still lagging behind the increase in gold prices. Over the past three years, the gold ETF SPDR Gold Shares (GLD) has surged more than 30%, while VanEck’s fund has only risen 11%.
However, this situation could change if precious metals continue to rally.
Earlier this month, gold prices hit a historic high of $2,462 per ounce. Although they have since declined slightly, the outlook remains solid. Firstly, there is significant uncertainty surrounding the U.S. election, which will spur safe-haven demand for gold. At the same time, the policies of the currently leading candidate, Trump, which include high tariffs and significant tax cuts, are more inflationary compared to the Democratic proposals, stimulating gold’s anti-inflation investment demand.
The most critical factor affecting stock prices is company earnings, and the earnings of gold companies are substantially dependent on gold prices. This is because the cost of gold mining is relatively fixed, and the rise in gold prices generally translates to profits for mining companies. The Q1 2024 quarterly report shows that the average all-in sustaining costs (AISCs) for the top 25 gold miners in GDX was $1,277, with the average gold price during this period being $2,072, thus a profit of $795 per ounce. During Q1 2023, the average gold price and production cost were $1,892 and $1,302, respectively, resulting in a per-ounce profit of $589.
Significantly, over the past year, gold prices have risen 9.5%, while the profits of the top 25 gold miners in GDX have surged 34.9%, indicating a leverage factor of 3.7 times between mining profits and gold prices. Therefore, during a gold price uptrend, gold stocks can amplify investor returns due to this leverage effect. However, as mentioned earlier, gold stocks have not risen in tandem with gold prices recently, suggesting a potential catch-up rally.
Looking forward to the upcoming Q2 reports, TD Cowen predicted last week that with the significant rise in gold prices but only marginal cost increases, gold miners’ profit margins are expected to grow by 46% compared to Q1, forecasting very robust earnings for Q2 2024. Based on this analysis, if the strong cash flow and profitability expectations materialize, they will likely draw investor attention.
From a valuation perspective, gold mining stocks remain cheap. The world’s largest gold producer, Newmont Corporation (NYSE:NEM), has a market value of $54 billion and a forward price-to-earnings (P/E) ratio of about 14. Another major gold company, Barrick Gold (NYSE:GOLD), also has a forward P/E ratio of only 13. In comparison, the average forward P/E ratio of S&P 500 materials stocks is around 20.
