Friday, April 23, 2021

Looking at Gold Miners

Last week, we mentioned Gold Miners and the Net Issuance Anomaly. The gold miners are profitable, have low debt, and are paying dividends and buying back stock. Investors were slow to respond when the airline industry consolidated down to four players with better discipline - until Buffett, who had always badmouthed the industry, bought big stakes in all four of them at single digit earnings multiples.

Mining (and maybe especially gold mining) has been a long bear market. The gold miners ETF (GDX) has been in a bear market since 2011 - a decade! - and is trading where it was 15 years ago. The junior gold miners ETF (GDXJ) is trading for half of what it was at inception in 2009.

Producers of natural resources - energy and metals - have the worst trailing performance of all the industries in the entire economy. Trailing performance this poor means that they should be cheap:

A fund manager might have a huge number of very cheap stocks they would love to buy, but if they do not have any available cash, they do not get to 'vote' on the market price by buying in the open market, as they lack the liquidity to do so - in the short term at least (longer term, you can reinvest dividends). Furthermore, if the said manager is suffering investor redemptions due to recent returns being poor, then regardless of the underlying managers' views on the long term attractiveness of individual securities, they will be forced to sell. It is therefore not uncommon for those most informed about the opportunities in undervalued securities to be actually selling them rather than buying, in direct contradiction to the EMH.

The market cap of Dogecoin ($31 billion), the sixth most valuable cryptocurrency, is twice the AUM of the GDX ETF. I would much rather own the entire energy production, energy transportation, and mining industries than all cryptocurrencies and the Robinhood 19 stocks (probably about $4 trillion combined!) Let's look at some possible gold miners.

  • Kirkland Lake Gold Ltd (KL) - market cap is $10 billion. They have no net debt. In 2020 they made $1 billion net, selling gold at an average price of $1.7k per ounce. They had $1.6 billion of operating cash flow, spent $582 million on capex and $848 million on share repurchases and dividends. They say that $400 million of last year's cap ex is "sustaining", so that would mean FCF of $1.2 billion or a 12% FCF yield. It's a shareholder yield (dividends + repurchases) of 8.5%. 
  • Gold Fields Limited (GFI) - $9 billion market cap, plus about a billion of net debt. They made $745 million net in 2020. They generated $1.3 billion from operations, spent $584 million on capex.
We also like the business model of Royal Gold as mentioned in our original value post last fall. I think a basket of these gold miners is cheap and adds diversification to similarly cheap investments like tobacco companies, oil and gas royalties, and pipelines.

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