If You Ever Wanted To Own Gold Miners: Here's Your Chance Now

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Includes: GDXJ, NEM
by: Victor Dergunov
Summary

Gold miners have become incredibly oversold.

One example is GDXJ, down by exactly 20% from its top, and trading at an RSI of 22.64.

Other high quality gold mining names have become abnormally cheap.

Newmont Mining is down by 17% in the last month alone, and is now trading at just 20 time forward earnings estimates.

Fundamentals surrounding the gold sector remain sound, and the recent selloff should be treated as a substantial buying opportunity.

gold mining Image Source

If You Wanted To Own Gold Miners: Here’s Your Chance

The gold mining sector has been battered in recent weeks. VanEck Vectors Junior Gold Miners ETF (GDXJ) is down by exactly 20% from its top, a textbook correction following stellar short-term gains earlier in the year.

Source: StockCharts

To put things into context, GDXJ surged by 35% from its December lows and began its correction in late February.

GDXJ Technicals Tell a Profound Story

GDXJ is trading towards the bottom-end of a multiyear trading range now. Crucial support now is the $28 level, and if the stock falls through we have another area of major support at $26.

However, I don’t expect GDXJ to fail technically here. The fundamentals surrounding gold and gold mining are simply too compelling to ignore at these oversold and discounted levels.

GDXJ appears to have bottomed last September, and that bottom was confirmed by a retest in December. The mid to long-term future image is extremely bright for gold, gold miners and GDXJ. Yet, this ETF is just 7% above its bottom in 2018, clearly something is not right here.

In comparison, tech stocks, discretionary names, communication, materials, industrials, etc. are up by approximately 25-35% off their respective bottoms in December.

Gold miners, especially smaller companies are very volatile. We can see that GDXJ was up by 35% off its bottom far before any other sector. Yet, it was not able to keep those gains, which produced a remarkably convenient 20% correction.

I believe now is a great time to step in to GDXJ, and other names in this sector with high upside potential.

GDXJ Covered Call Dividend Strategy

Right now, you can sell GDXJ’s June 7th $28.5 call options for $1. GDXJ’s current price is $28.18, so the covered call dividend payment you’ll receive is roughly 3.5% for owning GDXJ shares for only one month. Moreover, there is about 1.5% until strike price, so you are essentially guaranteed a 5% return in only one month with this strategy.

GDXJ: Get Exposure to the Best Small to Mid-cap Gold Miners

The VanEck Vectors Junior Gold Miners ETF aims to imitate the price and yield performance of the MVIS Global Junior Gold Miners Index (MVGDXJTR), which is intended to track the overall functioning of small-cap companies that operate in the mining sector for gold and/or silver.

The fund has total net assets of roughly $3.7 billion and each share in the ETF represents a part ownership stake in the fund for investors. The fund has a total of 57 holdings which include a 5.53% stake in Kirkland Lake Gold Ltd. (KLGDF), 4.9% stake in the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX), 3.9% stake in Alamos Gold (NYSE:AGI), 4.49% stake in IAMGOLD Corp. (NYSE:IAG), 3.59% stake in B2Gold Corp. (NYSEMKT:BTG), 3.66% stake in Osisko Gold Royalties Ltd. (NYSE:OR), and other smaller cap gold and silver related mining companies.

World’s Top Gold Miner

Image Source

Now could be the time to step in and buy not just GDXJ, but individual undervalued gold miners with high potential. Newmont Mining (NEM), an extremely solid gold miner, one of the best and biggest in the world is down by a staggering 17% in the last month.

Moreover, the RSI is at a ridiculously low 22, strongly suggesting that shares are abnormally oversold and are extremely likely to surge from the $30 level. In my view, we could see NEM at $33-35 within about 1 month.

NEM’s Valuation Extremely Compelling

NEM is expected to earn $1.45 per share next year, which puts its forward P/E ratio at just 20. This is relatively inexpensive for a dominant, market leading company, used to beating consensus forecasts.

NEM Used to Smashing Estimates

NEM has surpassed analysts’ estimates by a wide margin over the last 4 quarters. In fact, NEM has beat consensus EPS estimates by an average of 40%. NEM’s tenacity for beating analysts’ forecasts implies this trend is likely to continue going forward.

NEM is Extremely Cheap

It is not difficult to imagine that NEM can continue to outperform EPS wise going forward. Analysts’ estimates have shown a clear tendency for being too low for this company, therefore, NEM could conceivably beat next year’s EPS estimates by about 15-20%.

A 15-20% increase on next year’s consensus $1.45 in EPS would bring NEM’s earnings up to around $1.67 - $1.74 (this is below NEM’s $1.85 top-line estimates). Still, applying relatively modest EPS estimates of $1.70, implies NEM is trading at just 17.64 next year’s earnings estimates.

In addition, NEM is expected to increase revenues by nearly 36% this year and by 13% in 2020. Due to the significant rise in revenues NEM may be able to deliver even higher EPS going forward, which is why NEM remains one of the most compelling gold mining names to own in the world.

Get Covered Call Dividends with NEM

You can also layer a covered call dividend strategy on top of owning the stock to limit downside risk and increase yield substantially. NEM’s June 21st$30 calls can be sold (written) for $1.08 now, which gives you a 3.6% yield just to hold on to this stock for 6 weeks.

Also, not a bad short term gain, and the best thing is that you essentially can’t lose, because even if the stock stays around current levels you can continue to implement this covered call dividend strategy continuously. Implementing this strategy perpetually under stable price conditions would deliver around 32% annually, with minimal downside risk.

The only way you break even or you start to lose money is if the stock declines considerably, but I don’t see that happening, especially from these ultra-depressed levels.

Favorable Factors for Gold and Gold Miners

The Fed is Onboard

There is about a 50%/50% chance rates will either remain as they are today or will move lower from here. This is ultimately bullish for gold and gold miners as the Fed’s overall tone seems to be pointing towards an easier interest rate trajectory.

Source: CME Group

Another element to consider is that a recession is inevitable, and one could occur, theoretically as early as within the next 12-18 months.

What do you think the Fed will do if it feels growth is slowing to a level capable of triggering a recession? It will lower rates, or at least I hope that they will have enough sense to do so, but I have faith.

Speaking of Slower Growth

We see inflation creeping lower in recent months. This isn’t necessarily a bad thing, as it keeps the Fed from raising interest rates. However, if inflation continues its dip it could hurt gold prices.

Nevertheless, the most recent CPI number came in at 1.9%, noticeably higher than the previous 1.6% and 1.5% readings. I also think this is a favorable element for gold as it shows inflation rebounding, making a better case for higher gold prices.

CPI Inflation

Source: TradingEconomics.com

Incidentally, the Fed’s preferred gauge of inflation, the PCE came down to just 0.6% in its last reading, far below the Fed’s 2% target rate.

PCE Infaltion

Source: Investing.com

So, what is the Fed to do? It can’t raise rates, because inflation readings are much too low. In fact, a case could be made for dropping the funds rate 25 – 50 basis points. This would be extremely bullish for the economy, stocks, and especially for gold and gold miner prices.

The Bottom Line

Don't Turn Your Back on Gold Miners

GDXJ is down by 20% from recent highs, a textbook correction after stellar short-term gains. While CPI inflation is showing signs of improving, the Fed’s PCE’s most recent reading was a 0.6%, implying that from the Fed’s perspective inflation is far too low to even consider raising rates. Contrarily, the Fed is much likelier to ease interest rates over the next year, which should be enormously bullish for gold, gold miners, and DGXJ.

Additionally, many names have become extremely cheap, and extraordinarily oversold. NEM is one of the biggest gold miners in the world and is trading at just 20 times (consensus) forward earnings. Based on the company’s tendency to surpass analysts’ estimates NEM could deliver about $1.70 in EPS next year, putting its forward valuation at just 17.64, remarkably cheap for a company in NEM’s position.

Disclosure: I am/we are long NEM, GDXJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article expresses solely my opinions, is produced for informational purposes only and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please consider consulting a professional before putting any capital at risk.