What are we looking for?
The Bank of Canada is well into a cycle of interest-rate cuts, with the U.S. Fed expected to join it this week. In Canada we have had three reductions in the central bank rate since June. In the United States, the markets are pricing in a nearly 50-per-cent probability of a half-percentage-point cut on Wednesday with a total two-percentage-point reduction by March of next year. Lower interest rates weaken the underlying currency and strengthen the price of gold in that currency. In this environment, gold keeps setting new highs but are the gold stocks following? Let’s look at what are the stockcalc models are telling us for valuations here.
The screen
We used stockcalc’s screener to select the top 10 listed gold mining companies by market capitalization on the TSX. We then used stockcalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see if it is undervalued or overvalued compared with its price.
Overview of the techniques used:
- Discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
- A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
- An adjusted book value (ABV) is calculated by multiplying book value per share by its 10-year average price-to-book ratio.
- If we have analyst coverage, we may consider the consensus target price.
More about stockcalc
Stockcalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. Stockcalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to stockcalc using the promo code “Globe30,” which offers a 30-day free trial and special pricing for the second month.
What we found
You can see in the accompanying table the percentage difference between each stocks recent close price and its intrinsic value. The “stockcalc valuation” column is a weighted calculation derived from our models and analyst target data if used.
We expect gold stocks to have a high correlation to the price of gold. I wanted to look at this in more detail so I ran the correlation coefficients – or r2, a measure of fit ranging between minus-1 (no fit) and plus-1 {perfect fit) – between close price and the price of gold over the prior 60 months. Five of the 10 companies (AEM-T, AGI-T, K-T, WPM-T, LUG-T) had correlations well above 0.8, meaning 80 per cent of the stock price movements are explained by the underlying movement in the price of gold. Two stocks (ABX-T, DV-T) had limited correlations (0.2 range) and three (BTO-T, FNV-T and NGT-T ) were negative, telling us their stock prices and the price of gold were actually moving somewhat in opposite directions. I will go into more detail on BTO-T (B2Gold Corp.) below.
All stocks on this list are dividend payers, which is uncommon for any of the industries in the basic-materials sector. I see all of our adjusted book valuations are below current price, indicating historic price-to-book ratios were lower than today’s values (i.e. P/B ratios are rising for this group). Let’s look at a few of these companies:
Shares of B2Gold Corp. (BTO-T) moved up 20 per cent last week on the announcement they have agreed to terms with the state of Mali with respect to the continuing operation and governance of the Fekola Complex, which includes the Fekola Mine. The share price of B2Gold had diverged from the rising price of gold over the past 12 months on the back of lower-than-expected earnings, reduced guidance and uncertainty around Fekola. As noted above we saw a negative correlation between BTO-T stock price and the price of gold owng to these factors. Our models see a bit more upside in BTO-T after that 20-per-cent jump last week.
Kinross Gold Corp. (K-T) shareholders have been well rewarded in the past 12 months with the price of K-T doubling over the period. Kinross is a Canadian-based global senior gold mining company with operations and projects in the United States, Brazil, Mauritania, Chile and Canada. In its most recent quarterly report, the miner said: “Robust margins and significant free cash flow enable $200-million debt repayment.” Our models are showing Kinross with a bit more upside from here, with analyst consensus showing another 15-per-cent growth in share price expected. From our regression analysis above, Kinross has a 0.93 r2, indicting a very high correlation to the underlying price of gold.
Investing involves risk. Stockcalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis. Brian Donovan, CBV, is the president of stockcalc, a Canadian fintech based in Miramichi, N.B. Mr. Donovan holds positions in WPM, BTO and EDV-T.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.