Seeking Alpha

Top 10 Gold Mining Stocks For 2020

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Includes: AGCBF, AKG, ALO, ARNGF, EGO, EQX, IAG, SKREF, TMMFF
by: Don Durrett
Don Durrett
Growth, contrarian, newsletter provider, research analyst
Summary

My favorite risk/reward gold mining stocks for 2020.

Low valuations versus their upside potential.

Quality properties with long-life mines.

Exceptional leverage to higher gold prices.

Gold seems to be trending. I'm not sure if a new gold bull market has begun, but the gold technical chart looks very good. If we get above $1,600, then we could easily trend to a new high above $1,935.

If that happens, the gold miners are going to do exceptionally well. Why? Because every dollar that gold rises above $1,500 applies leverage to a gold miner's share price. The leverage comes from the fact that costs are somewhat fixed, and an increase in the gold price becomes immediate free cash flow (for producers).

Cash is king in the gold mining business because it costs money to mine and it costs money to find more gold to maintain your reserves. The better a company's balance sheet (more cash and less debt), the stronger their share price. Subsequently, as gold prices rise, a company's balance sheet improves, thereby making a company more valuable.

As a gold mining investor, you hit the jackpot when a few things unfold. First, you have to find a quality property. These are sometimes called flagship properties. I want them to be at least 2 million oz. in size, which creates a long-life mine. Second, you want the location to be low to moderate risk. Third, you want operating margins to be good, so that you have solid free cash flow. Fourth, you want a strong balance sheet that allows you to explore new mines and acquire new mines. Fifth, you want management to execute well and hit their cost and production targets. Sixth, you want to see a pipeline for growth that will generate more production.

The jackpot - big returns - can be anticipated if gold prices trend. The reason for this is mostly because you can find most of the factors that will create big returns. The one factor you cannot find is higher gold prices. This last factor you have to assume.

The stocks on this list have all of the factors that you need except higher gold prices. If we get higher gold prices, then these stocks should do well and have big returns. If you give these companies high free cash flow and a good balance sheet, then they have high upside potential.

Potential Risk

While gold appears to be trending higher based on its chart, there is always a chance that this is a false breakout. If gold prices drop, the gold miners will be pounded lower. Investors have shown very little patience to hold their positions if gold prices drop. Thus, there is extreme volatility in this sector. With big upside potential comes a big downside risk.

Stocks Included

The ten stocks included in this article all have high upside potential along with high quality properties. There are seven producers and three development stocks. They vary in market cap size with two stocks under $100 million and three stocks over $1 billion. These are not the safest, high quality gold miners. Instead, they are companies that have a certain degree of risk that can be overcome with higher gold prices. Thus, they are a bet on higher gold prices.

Alio Gold

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/3/2020)

Alio Gold

ALO

Gold

Mid-Tier Producer

$0.80

97M

$78M

Alio Gold changed their name from Timmins Gold after they acquired Rye Patch Gold. This stock has been an underachiever and management has not executed well. However, they will get better in a hurry if gold prices continue to trend. They have enough projects and resources to grow production and become a much larger company.

They are currently a 100,000 oz. producer in Mexico and Nevada. Plus, they have a nice project (Ana Paula) they are developing in Mexico. They have large resources for their market cap (5.5 million oz.) and could easily become a 200,000 oz. producer.

This is not a slam dunk stock, but they have low debt and will have a good balance sheet if gold prices continue to trend. As a speculation stock with high upside, it looks pretty good.

I always like to buy gold miners where my projected future cash flow is higher than their current FD market cap. Alio fits that criteria.

Amarillo Gold

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/3/2020)

Amarillo Gold

OTCQB:AGCBF

Gold

Development

$0.15

288M

$45M

Amarillo Gold looks really solid for big returns. I don't know why it is so cheap or what is going to stop it from doing well (other than lower gold prices or bad management). They have a quality project (Mara Rosa) in Brazil that is close to being shovel ready. It is a bit smaller than I would like (1.5 million oz. at 1.3 gpt), but has excellent exploration potential. Also, it is economic with low projected cash costs around $550 per oz. The capex is $123 million to produce 100,000 oz. annually.

All they need are final permits and financing. They are targeting production in 2021. Also, they did it right and do not have any debt at this time. Thus, they can be patient and wait for financing. The only red flag is they could get acquired for a low premium. Insiders own about 25% and so far have been able to prevent a hostile takeover attempt.

One thing I learned from this stock is that it is better to wait until development projects are close to being shovel ready before buying shares. What is quite common with development stocks is the share price drops in value as the dilute shares to finance pre-construction development (G&A, drilling, PEA, resource estimates, scoping studies, permitting, metallurgy, feasibility study, etc.).

Argonaut Gold

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/3/2020)

Argonaut Gold

OTCPK:ARNGF

Gold

Mid-Tier Producer

$1.50

183M

$277M

Argonaut Gold has been a successful mid-tier producer for more than a decade. They have a conservative management team that has done a good job of building and operating gold mines. That said, this is not an upper-echelon elite mid-tier company, which they are trying to become. They currently produce about 200,000 oz. annually and are not being rewarded by the market. Thus, they are undervalued.

They have three producing mines in Mexico and have three more to build. They have large resources, with 9 million oz. Plus, they have low debt and all-in costs around $1,200 per oz. I'm not sure why the market doesn't like them. They are having trouble permitting one of their projects, but they have three to build.

If I value them as a future 300,000 oz. producer, their annual free cash flow potential is almost their current market cap. That makes them very cheap on a long-term basis at higher gold prices. Their red flag is that a larger company could acquire them for a small premium. Undervalued companies tend to attract attention. I would not be surprised if they get taken out in 2020.

Asanko Gold

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/3/2020)

Asanko Gold

AKG

Gold

Mid-Tier Producer

$0.95

239M

$225M

Asanko Gold is a mid-tier producer in West Africa (Ghana). They have 1.7 million oz. open pit project (Nkran) that will produce about 220,000 oz. in 2020. That's a lot of production for their current market cap. They are undervalued because they do not have low costs, with all-in costs around $1,300 per oz. However, they do not have high debt ($30 million) and their costs should come down in 2020.

They are currently developing a second project (Essave), where they own 45%. It is a large project with 3.5 million oz. (1.2 gpt), with projected cash costs around $700 per oz. It is permitted and production should begin in 2021 or 2022. After Essave comes online, that will make them a 300,000 oz. producer.

I project that their potential future free cash flow is higher than their current market cap. I like to chase free future free cash flow and Asanko is a good opportunity to chase. I just need three things to happen. First, gold prices rise. Second, Essave comes online. Third, they do not get acquired by a larger company with less upside potential.

Cardinal Resources

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/3/2020)

Cardinal Resources

OTC:CRDNF

Gold

Developer

$0.23

526M

$125M

Cardinal Resources has a very large open pit project (Namdini) in West Africa (Ghana). It is a 7 million oz. (1.2 gpt) resource with a recently released feasibility study. They are currently working on permitting and expect to begin construction this year if they get financing.

They have a small FD market cap compared to their potential future cash flow. They plan to begin production at 300,000 oz. annually with a capex of $390 million. The cash costs are about $700 per oz. and the after-tax IRR is 30% at $1,300 gold. Thus, it is economic and is likely to get financed if gold prices remain above $1,500.

Other than the location, I don't see any red flags to justify its low valuation. If the mine gets built and gold prices rise, it will have a huge free cash flow. In fact, I forecast potential future free cash flow at nearly double their current market cap.

The red flag for this stock is the location, need for financing, and the possibility of getting acquired by a larger company. They seem to be a sitting target for a takeover, which I expect in 2020 if gold prices continue to trend. But what investor wants a quick 30% premium when you can have 500% or more if you wait for gold to break out? If they get acquired for less than $500 million, then it will be a bargain for the buyer.

Eldorado Gold

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/3/2020)

Eldorado Gold

EGO

Gold

Mid-Term Producer

$8.00

165M

$1320M

Eldorado Gold has a lot of gold (17 million oz.) for their market cap. If you have been reading this far, you know by now that I like to compare a company's current market cap to their projected potential future free cash flow. Eldorado Gold has four operating mines at about 400,000 oz. annually, and is building three more mines to expand production to 600,000 oz.

It's unusual to find such quality projects with such a low valuation. They do have a lot of debt ($449 million), but their all-in costs are pretty low at around $1,200 per oz. I think investors are nervous that a lot of their debt is due in 2022. But as long as gold prices trend, they will have no problem rolling it over.

Another reason, investors dumped the stock was from permit issues at their Skouries project in Greece. It is their 5 million oz. flagship. Those issues appear to be resolved. But even without Skouries they have a lot of gold. I think they are good mine builders and operations. Also, I consider this a growth story and could be a good dividend stock at higher gold prices.

Their red flag is that two of their operating mines are in Turkey, which adds location risk. Plus, their high debt and they still need to build Skouries, which will add more debt. So, while it has big upside potential, there is significant risk.

Equinox Gold

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/7/2020)

Equinox Gold

EQX

Gold

Mid-Tier Producer

$7.46

142M

$1062M

Equinox Gold appears to be pricey with a $1 billion FD market cap. However, they are merging with Leagold Mining to create a major in the making. I like both companies, so the combination should be something special. Plus, Ross Beaty will be the Chairman in charge, and he is one of the best.

Leagold Mining has a FD market cap of $870 million and four producing mines in Mexico. Their near-term target is 600,000 oz. of production. Equinox has been a growth story. They are currently producing about 240,000 oz. and are targeting another 200,000 by 2023. So, combined they will likely become a 1 million oz. producer. I expect them to exceed that total with Ross in charge.

The red flags are that they might not reach their targets and a somewhat constrained upside potential. After they close the merger, their combined market cap will be near $2 billion. But buying a potential 1 million oz. producer for less than $2 billion seems cheap to me. Plus, I expect this to be a growth company. I want in now at the beginning.

IAMGold Corp.

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/7/2020)

IAMGold Corp.

IAG

Gold

Mid-Tier Producer

$3.65

480M

$1725M

IAMGold Corp. is a global gold producer and one of the larger mid-tier producer. I expect them to become a major. They have quality properties and a quality management team. They are a bit pricey, but I expect them to do well with higher gold prices.

They currently produce about 800,000 oz. with 4 operating mines. They operate in Canada, South America, and West Africa. I consider this a growth stock because that is what management has been doing. They are currently building another large mine (COTE) in Canada, and it won't be their last.

Of all the mid-tier gold producers, I consider IAMGold to be one of the best. Their cash costs are around $800 per oz. which is low enough to give them a bit of safety for lower gold prices. Plus, it gives them leverage for higher gold prices. Their red flag is exposure to some political risk in West Africa.

Skeena Resources

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/7/2020)

Skeena Resources

OTCQX:SKREF

Gold

Development

$0.60

148M

$88M

Skeena Resources is developing a high-grade open pit (Eskay Creek) in the golden triangle region of British Columbia. They recently released a PEA that looks excellent to me. The after-tax IRR is about 50% at $1,300 gold. The capex is $233 million to produce 300,000 oz. (including silver). The grade is 4 gpt (including silver) and the cash costs are projected to be under $750 per oz.

I'm not sure why their market cap is currently so low. Perhaps investors are underestimating the premium Canadian producers are going receive when gold prices rise. A 300,000 oz. producer in Canada with moderate cash costs will be worth a fortune in the future. I project future cash flow at higher gold prices to be around $200 million annually. And I would expect them to be valued at a 10x free cash flow multiple. If you do the math, they are currently worth a fraction of that value.

Eskay Creek isn't their only project. They have two more projects that are both interesting and could provide cash flow in the future. I'm only valuing them as a 300,000 oz. producer, but it could easily be higher.

There are a few red flags. First, there is always dilution to develop and build mines. Share dilution will reduce the upside I have projected. Second, the CEO has never built a mine. I think that is part of the reason for the current low market cap. Third, Barrick Gold has an option to obtain 51% of Eskay Creek in 2020 (they have to make a decision by December). Barrick will have to pay Skeena about $75 million for the option.

So, worst case, Skeena gets $75 million and keeps 49% of Eskay Creek. They can use that money to advance their other to projects and let Barrick spend money developing Eskay Creek. Then they can borrow the money needed for the capex on Eskay Creek. Win-win-win in my book, for their three projects. The only way Skeena doesn't do well is if gold prices drop.

TMAC Resources

Stock Name

Symbol (US)

Type

Category

Share Price (US)

FD Shares

FD Mkt Cap (1/7/2020)

TMAC Resources

OTC:TMMFF

Gold

Mid-Tier Producer

$2.59

122M

$316M

TMAC Resources is a gold producer in Canada. It's not in an ideal location in Nunvut, but not a bad location either. It's a big property (400,000 acres) with a lot of drill targets (80-kilometer strike length). They are already producing 160,000 oz. annually, with cash costs around $750 per oz. They have plenty of gold at 6 million oz. (8 gpt), and that total is going to increase.

They plan to expand production to 6,000 tpd and are currently permitting phase 2. They do have $113 million in debt and will need to take on more debt to expand. Currently, they have about $50 million in cash and are producing free cash flow.

This stock is a sleeper in my opinion. I love Canadian gold producers and expect them to sell at a premium in the future. As long as TMAC can avoid a takeover, this stock could do really well. Newmont owns 28%, so either they will do the takeover, or they will have to approve a takeover.

Conclusion

These are my favorite 10 gold miners for 2020. I'm sure they won't all perform well, but, hopefully, most of them will. The key will be the gold price and how management teams execute. Hopefully, gold will remain above $1,500 and trend higher in 2020. Once we get above $1,600, the gold miners will be very healthy and producing significant cash flow.

Disclosure: I am/we are long ALO, AGCBF, ARNGF, AKG, EGO, EQX, IAG, SKREF, TMMFF. 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.