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Monday, 09/07/2020 2:53:16 PM

Monday, September 07, 2020 2:53:16 PM

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>>> A Trio of Precious Metals Stocks for the Next Gold and Silver Bull Markets


GuruFocus.com

August 28, 2020

By Alberto Abaterusso


https://finance.yahoo.com/news/trio-precious-metals-stocks-next-202233114.html


Outlook for gold and silver prices

Gold and silver were down over the past couple of days as a result of what the Federal Reserve said last week about its committee not seeing any need to set up a specific control program to keep bond yields depressed.

The yellow metal lost 4.2% from last week's highest price to trade at $1,923.85 an ounce on the London bullion market and $1,932.60 an ounce on the Comex, at close on Thursday.

The grey metal dipped about 3.75% to close at $27.245 an ounce on the London bullion market and $27.025 an ounce on the Comex on Thursday.

Thanks to the tailwind from several favorable factors, however, gold and silver skyrocketed on both markets, hitting record highs many times in August, which allowed investors to achieve impressive returns.

Year to date, gold is up about 25%, while silver gained approximately 51%.

The precious metals are expected to rebound from the recent corrections to continue to uptrend in the upcoming months as their fundamentals remain strong.

While the supply side may suffer from the temporary closure of operations due to restrictions imposed by governments worldwide to prevent the spread of Covid-19, the demand is growing as increased volatility spurs investors toward safe haven assets.

Gold and silver operators

Therefore, with gold and silver expected to move higher, investors should increase their positions in strong performers.

For the upcoming period, I recommend Barrick Gold Corp. (NYSE:GOLD), Wheaton Precious Metals Corp. (NYSE:WPM) and Silvercorp Metals Inc. (SVM), whose share prices have risen 54%, 73% and 36% so far this year, benefitting from strong operating activities.


Barrick Gold

The Canadian gold giant closed at $28.58 per share on Thursday for a market capitalization of $50.7 billion.

The share price is not cheap as it is above the 150- and 75-day simple moving average lines, and about 30% above the midpoint of the 52-week range of $12.65 to $31.22. However, it is not expensive either as the enterprise value-earnings before interest, taxes, depreciation and amortization ratio of 5.83 stands below the industry median of 10.71 and the price-book ratio of 2.23 is on par with the industry median.

Furthermore, a 14-day relative strength index of 50 indicates there is still room for further upside as the stock has yet to reach overbought levels.

Barrick Gold is topping the industry in terms of a higher trailing 12-month Ebitda margin rate (90.6% compared to the industry median of 22.5%) thanks to a portfolio of strong mining activities it holds in North America, Latin America, Africa and the Middle East.

When investors purchase shares of Barrick, they should be aware that, although unique from both a quantitative and qualitative standpoint, the assets base of the company, which also includes six world class deposits, implies taking some risks related to the hosting countries.

Nearly 20% of the total output of attributable gold derives from production in Argentina, Papua New Guinea and Mali, three countries that for various reasons pose a threat to operating activities.

Barrick mines gold and copper from its mineral reserves, which account for 64 million ounces of gold and total 10 billion pounds of copper, located in Canada, Nevada, the Dominican Republic, South America, Papua New Guinea, West and Southern-Central Africa,and Saudi Arabia.

Looking ahead to full-year 2020, the mining company expects to dig up 4.6 million to 5 million ounces of gold at an all-in sustaining cost of $920 to $970 per ounce of metal sold, and mine 440 million to 500 million pounds of copper at an AISC of $2.20 to $2.50.

In the second quarter, Barrick posted adjusted earnings of 23 cents per share, topping estimates by 5 cents, on revenue of $3.06 billion (up 49% year over year) thanks to a 31% rise in the realized gold price to $1,725 per ounce and a 24% jump in the copper production to 120 million pounds. The production of gold fell 15.1%, mainly due to restrictions related to the coronavirus.

Wall Street recommends an overweight rating, which means the share price is projected to outperform the industry with an average target price of $33.18 per share.


Wheaton Precious Metals

The Canadian gold and silver streaming company traded at $51.41 per share at close on Thursday, determining a market capitalization of $23.01 billion.

The stock is not trading cheaply as the share price is 34.3% over the midpoint of the 52-week range of $18.66 to $57.89 and above the 150-, 75- and 35-day SMA lines.

Also, the enterprise value-Ebitda ratio of 36.19 and the price-book value of 4.14 stand higher than the industry medians of 10.67 and 2.22.

However, a 14-day relative strength index of 50 indicates that the share price can still go higher.

The streamer is benefitting from high profitable operating activities as the trailing 12-month Ebitda margin is 67%, compared to the industry median of 22.5%.

Although the streaming agreements of Wheaton refer to assets residing in friendly mining jurisdictions, a fraction of total production is exposed to a considerable risk of loss as some of the operating mines are located in regions that are characterized by intense seismic activity.

Three operating mines in Peru and one in Mexico, which together account for 5% of total production of gold and 30% of total production of silver, fall within the Ring of Fire, which is a path extending for total 20,854.8 miles along the Pacific Ocean, producing 85% of the world's seismic activity.

The other streaming agreements are for assets located in North America, the Republic of Guyana, Chile, Argentina, Brazil, Portugal, Greece and Finland.

The company has lowered its full-year output guidance at a range of 655,000 to 685,000 ounces of gold equivalent, while reaffirming its long-term production forecast of 750,000 ounces of gold equivalent to produce every year over the next four years.

In the second quarter, Wheaton Precious Metals recorded pro-forma earnings of 22 cents per share, beating estimates by 3 cents, on revenue of nearly $248 million (up 31% year over year) thanks to higher metal prices and a 5.5% sales volume jump to 156,200 ounces of gold equivalent. Furthermore, the cash operating margin rate advanced by 35% year over year to $1,170 per ounce of gold equivalent sold despite the temporary closure of some operating activities due to Covid-19.

Wall Street recommends an overweight rating with an average target price of $55.11 per share.


Silvercorp Metals

The Canadian silver, lead and zinc mining company closed at a price of $7.7 per share on Thursday, for a market capitalization of $1.34 billion.

The share price is not cheap as it stands 54% above the midpoint of the 52-week range of $1.5 to $8.49, and significantly over the 150-, 75- and 35-day SMA lines. Moreover, the enterprise value-Ebitda ratio of 14.46 is higher than the industry median of 10.71, and the price-book ratio of 3.28 stands above the industry median of 2.23.

Despite these valuations, the share price can still grow a lot as indicated by a 14-day relative strength index of 56, which means that the stock is far from approaching overbought levels.

Its Chinese assets, where the miner is producing the metals in concentrates, are operating profitably as the trailing 12-month Ebitda margin rate yields 52.5% versus the industry median of 22.5%.

Investors should know that 10% of the total silver, 15% of total lead and 70% of total zinc sold are extracted from mine sites in the Guangdong province, which, given its geographic position, is exposed to natural events such as floods and landslides due to monsoon rains.

In general, China is still considered a tough place for American companies to do business, which enhances the country risk to the maximum level.

For fiscal 2021, which will end on March 31, 2021, the company is targeting to mine between 6.2 million and 6.5 million ounces of silver, between 66.1 million and 68.5 million pounds of lead and between 24.5 million and 24.7 million pounds of zinc. The AISC per ounce sold is expected to fluctuate in the $122.6 to $135.5 per ton range.

Silvercorp posted earnings of 9 cents per share, topping expectations by 5 cents, on a 2.5% year-over-year increase in revenue to $46.7 million, benefitting from more silver sold (up 1% to 1.9 million ounces), gold (up 10% to 1,100 ounces) and lead (up 17% to 20.9 million pounds) and higher precious metals prices. The 5% decline in the total sales volume of zinc to 7 million pounds was, therefore, more than offset by the above improvements. The operating cash flow rose 51% to approximately $30 million.

Wall Street recommends an overweight rating with an average target price of $7.01 per share.

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