Inflation continues to run hot, and with the fed behind the curve, economists believe it will take some time before we hit peak inflation. Therefore, it’s essential to have stocks in your portfolio that are a hedge against the current inflationary environment. One of the ways you can do that is through gold miners. In addition to being a hedge against inflation, gold is also a hedge against volatility.
Where might gold prices go in 2022?
A rise in recycling and production meant gold supply increased by 4% in Q1 of 2022; total gold production for the year is expected to come in around 3800 tonnes. Meanwhile, gold demand in Q1 of 2022 was up 34% Y-o-Y primarily due to an increase in ETF flows, along with ETF’s global jewelry demand has also been putting pressure on gold prices. Demand for the year is expected to remain robust and may come anywhere from 4500-5000 tonnes. Although, gold prices have remained flat, and gold currently trades anywhere between $1800-1900 per ounce, the difference in demand and supply and the backdrop of inflation, could increase the prices anywhere from $2000-2300 per ounce, which would translate into an increase of anywhere from 10-25% for the year. Such an increase would be very positive for gold stocks as realized price per ounce increases, along with production. As a result, the combination should help bring in record levels of cash flow for gold miners.
Risks to gold
Gold has continued to trade sideways for a while now. While inflation is not going away in the near future, the deflationary effects of monetary policy could weigh on gold prices as quantitative tightening sucks the liquidity out of the market. Furthermore, demand for jewelry and other conspicuous consumption of gold could fall in demand well. Demand and supply dynamics and liquidity will remain the two significant factors to consider.
Consider the following two stocks:
Kinross Gold (NYSE: KGC) is one of the most prominent gold miners. The company is based out of Toronto, Canada and has operations in the United States, along with Russia, Brazil, Chile, and Ghana.
Kinross gold underperformed in the first quarter, as production fell. But, during the next three quarters, management expects that company is likely to ramp up production to historical levels. The first quarter production came in around 410,000 ounces of gold, down from the Q1 2021. This was mainly due to operational realignment at their U.S. sites. Kinross expects that as the quarters proceed, production should normalize, and has projected that it should produce 2.15 million ounces for the year; that number could rise by a further 5% as production continues to ramp up.
The all-in expense per ounce of gold came in at $1214 for the quarter, and with a lower cost of sales, it could fall below $1200 for the year. Free-cash flow for the quarter ex one-time costs came in at $155 million. Meanwhile, free cash flow for the coming quarter should significantly increase as those capital expenditure costs reduce. The increase in cash flow should help improve the stock’s fortunes.
Currently, the stock trades at a price-to-earnings (P/E) ratio of 35x, but as production ramps up, and if the price of gold increases, the forward P/E could fall to 12-13x earnings, which would make the stock relatively cheap compared to the broader market.
Royal Gold (NASDAQ: RGLD) continued to beat expectations as it ramped up production for the first quarter. The company acquires and manages precious metal streams, royalties, and related interests. It has interests in 187 properties, including 41 mines that produce primarily gold but also silver, nickel, cobalt, and zinc.
Management expects to produce around 315,000-340,000 gold equivalent ounces (GEO) and has projected a realized price of $1800 per GEO ounce. Total revenue is expected to come in slightly higher for the year if the realized price remains around $1800, but if the price of gold increases, annual revenue could increase by a further around 15%. Meanwhile, earnings are expected to increase anywhere from 10-20% for the year as the lower all-in cost of production improves the bottom line. Furthermore, royalty streams should increase as crucial mining operations return online, increasing output during the next few quarters. Operations from their Botswana mine are also expected to go online, which should help increase revenue from the stream side of the business.
Guidance is currently quite conservative and considering that production is expected to continue to increase, revenue could come in much higher, which mean forward P/E could fall to around 15x earnings, and would make the valuation a lot more attractive than it is now.
It should be noted multiple analysts have recently upgraded the stock to a “buy”.