02 MAY 2024
A major bull market in gold mining stocks began in January 2016 after a brutal 5-year downturn that saw the GDX gold miners ETF shed almost 80% in dollar terms and many of the junior producers go bust.
Since then, GDX has produced an impressive 160% gain in dollar terms, equivalent to almost 13% per annum. This exceeds the returns from both gold bullion and the global stock market over the same period. Despite this, we’re surprised the mining stocks haven’t performed better as they typically have even more upside potential when gold is rallying strongly.
The charts below show valuation is not a hurdle to higher prices which, in turn, suggests the broader bull market in gold and silver equities has further to run.
On a price to book basis, gold mining stocks are trading around just 1.5x (blue line), exactly half the 3x multiple they have averaged since 1980 and well below the 13x late 1980s peak.
Simply put, gold miners are trading at very cheap levels in absolute terms, especially when you factor in their solid (low/no debt) balance sheets, healthy cashflow & dividend yields and improving profits outlook. After its 8% Q1 gain, the gold price is trading around a record U$2,300/oz, which compares to an average all-in cost of production of U$1,350/oz for the gold mining industry.
Gold miner profit margins have seldom been this high and, significantly, they are trading cheaply relative to broader equity markets. Per the second chart (red line), the price/book valuation of gold miners compared to the equivalent for the world stock market is trending towards the lower bounds of a 40yr range.
This begs the question, what could be the catalyst for the next big move higher in gold mining shares? If history is any guide, a wave of M&A activity would be quite normal at this stage of the cycle and that typically sparks a strong market rally, especially in the more speculative, junior mining stocks.
Encouragingly, there are signs that this consolidation trend is underway with the surging gold price encouraging the larger producers to secure future supply growth via mergers and acquisitions.
Watch this space.
The content of this communication is for information purposes only. Bentley Reid believes that, at the time of publication, the views expressed are a matter of opinion but cannot guarantee replication of depicted performance. Viewers intending to take action based upon the content of this communication should first consult with the professional who advises them on their financial affairs. Capital invested will be at risk, and you may get back less than you invest. Neither the publisher nor any of its subsidiaries or connected parties accepts responsibility for any direct or indirect loss suffered by a recipient as a result of any action or inaction, in reliance upon the content of this communication.
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