My Favorite Gold/Silver Miners: Newmont And Pan American
Summary
- The sharp drop last week in gold/silver miners is creating better future upside for new investment.
- Coronavirus disruption effects are leading to lower interest rates, more money printing, and eventually greater investor demand for the precious metals.
- The odds of a hyperinflationary, record money printing event by central banks worldwide are increasing daily. Gold/silver ownership may become a necessary portfolio holding soon to conserve wealth.
I believe now is a good time to purchase many precious metals miners. The spillover effect of last week’s 15% global equity market decline has led to some profit taking in the high-flying miners. As I have written since November, gold, silver and platinum bullion ETFs have been the center of my attention and precious metals investments. The bullion ETFs looked like a better risk/reward proposition with the general stock market at all-time highs. As a consequence, I have kept my weightings in gold/silver miners lighter than usual since late summer, anticipating a stock market breakdown would initially hold their quotes at a lower level.
However, I think the 20-30% drop in the largest mining concerns of late has opened up smarter valuations and prices to start buying again. I purchased starter stakes in Newmont (NYSE:NEM) and Pan American Silver (NYSE:PAAS) on Friday. If the two continue lower in price in next week, my plan is to add shares in both. Here’s a short explanation why.
Runaway Money Printing in 2020?
I think my last Seeking Alpha article on the potential for hyperinflation money printing from a coronavirus pandemic related recession is my best rationale on why you need to own some gold/silver exposure going forward. After the brutal and extraordinary 7-day 15% decline in the Dow Jones and S&P 500, everyone is screaming at the Federal Reserve to print more money and bail out losing equity positions. The Treasury bond yield curve is officially inverted again, meaning we are at, or near, recession in coming weeks. If and when actual quarantines begin in America, and the global supply chain becomes truly fragmented, the FED may not have a choice but to print new money at record rates. It is entirely possible money creation (devaluation) will be at even greater rates than was necessary during the 2008-09 Great Recession, as debt levels are at record highs. At some point, banks, governments and investors will realize the only honest hedges against tons of money printing and future inflation are the monetary metals of gold and silver (before other commodities get a bid anyway).
Relative Miner Valuation Technique
Trading gold and silver mining companies for over 30 years, I can argue most miners remain quite cheap under current economic circumstances, before out-of-control money printing appears. Historically, blue-chip gold miners with 20+ years of proven economic reserves are valued at 50% to 100% premiums on financial ratios like price to book value, sales and earnings against the overall stock market averages. When you compare valuations today to equivalent S&P 500 multiples, miners are still not appreciated to any great extent.
Newmont and Pan American are perhaps the two best run and most profitable miners in the world right now, with safer-nation diversified mine reserves of 20+ years, using flat to higher gold/silver price assumptions.
Newmont trades around 1.5x book value, 3.5x sales (at current metals prices), and 18x earnings (using Wall Street analyst estimates for 2020). Pan American Silver goes for 1.5x book value, 9x sales and 16x income generation. Plus, Newmont is paying a dividend yield of 1.3% and has announced share buybacks (an unheard of financial strength position in the industry right now), with Pan American doling out 1% in dividends to new buyers. Compare these numbers with the S&P 500 valuation of 4x book value, 2x sales, and 22x earnings with a 2.0% dividend yield. Under long-term “relative” valuation assumptions to the overall market, the best gold miners should trade between 6-8x book value, 3-4x sales, 30-40x earnings, with a dividend yield just above 1% today. From a historical perspective, my favorite two blue-chip miners are trading at sizable discounts to relative earnings and book value calculations presently. In total, I figure Newmont’s long-term average worth, using this relative valuation method is closer to $50-60 per share. Pan American’s underlying long-term value is in the $25-30 range.
Miners vs. Short-Term Interest Rates
Another point I need to make regarding valuations revolves around earnings yields from the best miners against short-term U.S. Treasury bill rates. You can argue, earnings yields generated by a long-life gold miner are actually a safer long-term ownership proposition vs. the “risk-free” Treasury yield concept taught in college finance courses. Traditionally, this has been borne out through history the last hundred years - the highest quality gold/silver miners have earnings yields LESS than the prevailing Treasury bill. The reason is over time Treasury bills have no inflation hedge component. On the contrary, gold/silver miners, well managed, with long-term reserves have a very real inflation and money printing hedge component. Money printing = higher inflation = higher gold/silver prices = rising earnings and dividends from precious metals miners. All told, owning a blue-chip gold mine should be a smarter long-term investment proposition vs. holding Treasury bills, in an era of no holds barred money creation. In essence, a quality gold mine is a "safer" investment than buying a U.S. Treasury security, backed by nothing but promises of future borrowing and debasement of your initial investment's purchasing power.
Using this valuation method, gold/silver miners are completely undervalued, and have been for many years. For example, the ultra-low interest rates of the 1930s Depression period proved a great time to own gold assets, despite deflation. A 70% increase in the official U.S. gold price fix to Dollars from the late 1920s to 1934 led to an increase in profitability for miners. Plus, turbulence in the stock market, including an 80% decline for the Dow Industrials between 1929-33, forced investors to look for a safe haven. In combination, these factors led gold miners like Homestake Mining to the highest investment returns for investors during the 1930s. Again, the period of ultra-low interest rates globally after the technology stock boom ended in 2000, also generated the biggest jump in gold/silver assets since the 1970s. Gold’s all-time high of $1900 an ounce and silver’s peak around $50 were reached in 2011, from $275 and $6 respectively in 2001.
With U.S. short-term rates today in the 1-2% range and falling, gold/silver miners generating rising income from the 2019-20 gold/silver jump present a terrific opportunity for investors, based on earnings yield valuations. I can argue a major recession causing interest rates to approach ZERO in the next year or two, could make the best gold/silver miners dramatically more appealing to experienced long-term investors. The whole idea of hyperinflation is a function of interest rates that are far too low (money printing too high) vs. the economic realities of life. We may get into that situation very soon, if coronavirus problems derail the global economy. If the world sees zero or negative interest rates lasting years, the reasons to avoid gold/silver assets will no longer exist. We could be entering a Twilight Zone launch pad for precious metals priced in paper fiat currencies.
The complete argument (or disconnect in the markets to capture today) to own Newmont and Pan American Silver is a likely drop in short-term interest rates could compound to the upside, the value of ownership in a dramatic rise in gold/silver quotes. To a degree, you will be riding two catalysts for positive price change higher. Current buyers in Newmont and Pan American are getting a better than 5% earnings yield on $1600 gold and $17 silver. If we see $2000 gold and $25 silver later in 2020, and Wall Street revalues them at say a 2-3% earnings yield as interest rates plummet, a double or triple in Newmont and Pan American’s stock price could be just the beginning. How many other investments have the potential to rise 100% or 200% the next 12-18 months, from the all-time high valuations of the S&P 500 just a week ago? Then sprinkle on the potential for hyperinflationary issues from truly excessive money printing and we have the increasing odds of $3000-5000 gold and $50+ silver in rapid fashion. What if Newmont and Pan American are 10x baggers the next 3-5 years? Can you afford NOT to hold the two best-positioned, risk-adjusted, blue-chip gold/silver mining, monetary printing hedges available?
Conclusion
Now is a great time to add gold/silver positions, especially two of the strongest, long-life reserve miners focused on assets in the Americas. Newmont and Pan American Silver are even better long-term buys, if they decline in price in coming weeks. Turmoil in the financial markets, a jump in money printing levels, a drop in interest rates and logically rising gold/silver prices, as a consequence, may put the precious metals miners in a best-of-all-worlds situation for meaningful investment gains during 2020-21.
I have pictured below the super large and highest-quality gold/silver reserve bases for both Newmont and Pan American Silver taken from their websites. When you consider all-in cost structures, already high income generation at current metal quotes, long-life reserves, and superb management teams, I would start with these two miner names in a properly constructed risk-pyramid portfolio design for the precious metals part of your portfolio.
Image Source: Newmont Website
Image Source: Pan American Website
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Analyst’s Disclosure: I am/we are long NEM, PAAS. 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.
This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.
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Comments (17)
thefly.com/...
For example, what percentage of the theoretical value of reserves at current prices of gold and silver?
My spec pick is FSM. Huge reserves in Argentina and I think the upside is big. But certainly not a blue chip.