AXMIN Inc (TSXV: AXM)
AXMIN Inc. (TSXV:AXM) is a Canadian-based exploration and development company with a strong focus on central and West Africa.
Since January, gold prices have risen nearly 35%. The stock prices of gold mining companies have also increased by about the same amount. Although they have performed poorly recently, mining stocks seem to be a more attractive inflation hedge compared to gold itself.
Historically, the protective role of mining companies against price increases has been very weak. Over the past thirty years, the U.S. Consumer Price Index has more than doubled, while gold prices have increased sixfold. During the same period, the Philadelphia Gold and Silver Index of publicly traded miners rose by about 40%. Mining benchmarks remain well below their peak in 2011. Since then, U.S. prices and gold prices have increased by 33% and 55%, respectively.
In the early 21st century, following the surge in gold prices, mining companies pursued growth at any cost. They borrowed freely, aggressively developed new projects, and significantly increased costs by extracting gold from low-quality mines (referred to in the industry as low-grade). The average debt level of the four major mining companies rose to 50% of their net assets.
After the gold price dropped in 2011, mining companies faced significant difficulties. At that time, Barrick Gold, the world’s largest mining company, announced a write-down of about $23 billion in assets between 2012 and 2015.
Caesar Bryan, the portfolio manager of the Gabelli Gold Fund, stated that over the past decade, mining companies have overcome their difficulties. They have introduced new management teams that focus on generating cash rather than maximizing production. They have also limited capital expenditures and strengthened their balance sheets.
Historically, gold mining companies have underperformed, even earning a lack of trust from industry insiders. However, Bryan insists that gold mining stocks still appear cheap based on most valuation metrics. Assuming current spot prices remain stable, he expects several mid-tier gold mining companies—including Endeavour Mining and Dundee Precious Metals, listed in Toronto—to generate free cash flow equivalent to 20% or more of their current market capitalization.
The stocks of gold mining companies are also at historical lows relative to their net asset value. This metric is derived by estimating reserves, deducting mining costs, and applying a 5% discount rate to the resulting cash flows.
Stefan Rehder, founder and managing director of Munich-based Value Intelligence Advisors, noted that this indicates the net asset values of gold mining companies are undervalued.
After suffering severe losses a decade ago, gold mining companies have maintained capital discipline. The industry’s pessimistic outlook on gold has prevented them from mining lower-grade ore. Given the stock market’s low valuations of gold mining companies, mergers and acquisitions have seen a resurgence as acquiring competitors makes more sense than developing new projects.
The World Gold Council reported that after experiencing 12 months of outflows, inflows into gold ETFs turned positive in the third quarter. The surge in gold prices is impacting the earnings of gold mining companies. With substantial expected cash flow returns, gold mining companies offer investors a margin of safety. If gold prices remain strong, the stock prices of gold mining companies should be substantially higher.
