Analysts' Ideas of the Week
Gold at Record Highs, Gold Stocks Still Lagging: A Hidden Opportunity
ByFRC Analysts
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Highlights
Gold is shining brightly in 2025, with prices soaring to US$3,290 per ounce, driven by geopolitical tensions, central bank buying, and economic uncertainty. Yet, gold mining stocks are not keeping pace, trading at valuations that suggest they are undervalued relative to gold’s rally. This disconnect presents a potential opportunity for investors seeking exposure to the gold market. This article examines the gold mining sector’s performance from 2021 to the present, highlighting why these stocks may be poised for a revaluation in 2025.
Gold: Key Performance Metrics
Source: S&P Capital IQ
Trading Multiples: Undervaluation Amid Rising Gold Prices
The trading multiples of gold mining companies indicate that the sector has yet to fully price in the recent surge in gold. As shown in the table above, despite a significant increase in gold prices over the past four years, the EV/EBITDA multiple has remained stable, while the Price-to-Earnings (P/E) ratio has compressed. This suggests that gold stocks are currently trading at attractive valuations relative to their EBITDA and earnings. We believe sustained high gold prices could prompt investors to reassess these multiples, potentially triggering a revaluation of mining stocks in 2025.
Profitability: Strengthening Returns Amid Challenges
Profitability metrics underscore the sector’s resilience. Return on Assets (ROA) has risen from 4.8% in 2021 to 6.9% currently, reflecting improved asset utilization as gold prices boost revenues. Return on Capital (ROC) has increased from 6.1% to 8.8%, and Return on Equity (ROE) has jumped from 8.7% to 12.1%, indicating that gold miners are generating stronger returns for shareholders. These gains suggest that miners are leveraging high gold prices to enhance efficiency, despite operational hurdles like rising costs.
Margin Analysis: Navigating Cost Pressures
Margin trends reveal a sector grappling with costs but showing signs of recovery. Gross Margin has declined from 20.5% in 2021 to 11.5% currently, reflecting pressures from rising production costs, labor, and energy expenses. EBITDA Margin has fallen from 13.8% to 8.8%, and EBIT Margin has dropped from 10.8% to 7.1%, indicating squeezed operating profitability. However, the recent uptick in margins suggests that miners have begun to optimize costs and improve efficiency.
Liquidity and Leverage: A Robust Financial Foundation
Liquidity and leverage metrics indicate a financially sound sector. The Current Ratio, a measure of short-term liquidity, has stabilized at 1.8x. Total Debt/Equity has plummeted from 33.2% in 2021 to 4.6% currently, and Total Debt/Capital is down from 24.9% to 4.4%, reflecting significant deleveraging. The EBITDA/Interest Expense ratio has soared from 16.1x in 2021 to 30.2x, highlighting strong debt coverage and financial stability.
Why Gold Miners Are a Hidden Opportunity
The gap between gold’s record highs and gold mining stocks’ underperformance creates a compelling opportunity. Operational efficiencies are enhancing profitability. We believe the sector’s attractive valuations, improving financial metrics, and growth potential make it a hidden gem in a booming gold market.
Check out our top picks here: https://www.researchfrc.com/top-picks
Our top junior gold mining picks from the companies we cover are Monument Mining (TSXV: MMY) and Denarius Metals (CBOE: DMET).
