A few weeks ago, retail giant Costco Wholesale (COST) offered one-ounce bars of gold for sale in both Canada and the U.S. The gold bars could be bought by Costco members, but only two at a time, every seven days. Customers loved it. At Costco's quarterly earnings call, CFO Richard Galanti commented on the high demand, saying, “When we load them on the site, they’re typically gone within a few hours.”
There’s a reason Canadians love gold. Over the past five years, the price of gold in Canada has risen over 70%, while the Morningstar Canada index is up a little over 8% annualized.
“Spot gold prices have risen recently to around USD 2,040 per ounce on rising expectations that the world’s central banks, led by the Federal Reserve, are close to ending interest rate increases. This has been a tailwind to many gold miners’ share prices (gold investment lacks cash flows for owners and rising yields make bonds relatively more attractive, and vice versa.),” said Jon Mills, an analyst at Morningstar who covers gold stocks.
Cheap Canadian Gold Stocks
For investors who don’t want the actual metal, but still want exposure to gold, there are gold company stocks to consider. Morningstar analysts cover four Canadian gold company stocks, and two are currently undervalued. Here’s the list:
It is important for investors to remember that none of these stocks have a competitive advantage or an economic moat. Here is what Mills thinks of these stocks.
1. Barrick Gold (ABX)
- Morningstar Fair Value Estimate: $29
- Morningstar Star Rating: 4-Stars
- Economic Moat: None
We retain our fair value estimate of USD 21 per share for no-moat Barrick Gold after its 2023 third-quarter result met our expectations. Adjusted EBITDA of USD 1.46 billion rose 27% on the third quarter of 2022, driven by higher gold prices and sales volumes, partially offset by increased unit cash costs. The balance sheet remains strong, with minimal net debt of about USD 510 million. It will pay a USD 0.10 (CAD 0.137) per share dividend in December, half that paid last year but in line with its dividend policy. We forecast total 2023 dividends of USD 0.40 (CAD 0.548) for a 2.5% forward yield at current share prices. Barrick targets a quarterly base dividend of USD 0.10 per share, with additional dividends potentially payable if it has net cash on the balance sheet. We think this is a reasonable approach. Though as its shares trade at around a 24% discount to fair value, we think share repurchases would be a better use of surplus funds. We think the discount to fair value is likely due to concerns over rising real interest rates, which are a headwind to gold prices.
2. Agnico Eagle Mines (AEM)
- Morningstar Fair Value Estimate: $73.5
- Morningstar Star Rating: 3-Stars
- Economic Moat: None
No-moat Agnico Eagle’s 2023 third-quarter result met our expectations. Adjusted EBITDA of USD 760 million increased 13% on the same quarter of 2022, driven by higher gold sales volumes and price, partially offset by increased unit cash costs. Adjusted net profit after tax of roughly USD 220 million was similar to last year due to higher depreciation and amortization from the purchase of the remaining 50% of the Malartic mine from Yamana Gold in March 2023. The balance sheet is sound. Net debt was USD 1.6 billion at end September 2023, around 0.5 times trailing 12 months EBITDA.
We retain our fair value estimate for no-moat Agnico Eagle of USD 53 per share, with shares trading at an 11% discount to fair value. We think this is likely due to concerns over rising real interest rates, which are a headwind for gold prices. We forecast production to rise to about 3.5 to 3.6 million ounces over our five-year forecast period, driven by incrementally higher production at most of its mines. Agnico’s average unit costs place it comfortably within the second quartile of the industry cost curve, lower cost than larger competitors no-moat Newmont and no-moat Barrick Gold. We also think it is exposed to lower sovereign risk than its larger rivals. About 80% of its forecast 2023 production comes from the more stable jurisdictions of Canada and Australia.
3. Kinross Gold (K)
- Morningstar Fair Value Estimate: $8
- Morningstar Star Rating: 3-Stars
- Economic Moat: None
No-moat Kinross Gold’s 2023 third-quarter result was better than our expectations. Higher gold sales volumes and prices along with lower unit cash costs drove a 66% increase in EBITDA, to USD 490 million, compared with the same quarter of 2022. Kinross will pay a USD 0.03 (roughly CAD 0.042) dividend in December, the same as last year and in line with its quarterly dividend policy. We forecast total 2023 dividends of USD 0.12 (CAD 0.167) per share for a 2.2% forward yield at current share prices.
We modestly raise our fair value estimate for Kinross Gold to USD 5.35 per share, up from USD 5.20, driven by Kinross extending production at its Round Mountain mine in Nevada. The additional ounces are likely to come online in 2025 or 2026. We now forecast sales volumes of roughly 1.9 million gold equivalent ounces, or GEOs, in 2027, up from about 1.8 million previously, with its Paracatu and Tasiast mines accounting for roughly half.
4. Newmont (NGT)
- Morningstar Fair Value Estimate: $73
- Morningstar Star Rating: 4-Stars
- Economic Moat: None
We retain our fair value estimate for no-moat Newmont of USD 53 per share after updating our forecasts to incorporate the acquisition of Newcrest and the latter’s financials at end of September 2023. We do not assign an economic moat to the enlarged Newmont and reiterate our Medium Uncertainty Rating for the company.
Newmont shares remain materially undervalued in our view, trading at a 31% discount to fair value. We think this is partly due to concerns over rising real interest rates, which increase the opportunity cost to hold gold. Another likely reason is Newmont’s currently elevated unit cash costs. Unlike smaller competitors Agnico Eagle and Kinross Gold, Newmont’s sales for the first nine months of 2023 have disappointed, diluting margins, but we think sales will increase and margins improve.
The acquisition of Newcrest extends Newmont’s lead over Barrick Gold as the world’s largest gold miner by sales. We forecast Newmont to increase attributable gold sales to around 8.8 million ounces in 2027, up from roughly 7.3 million in 2023 pro forma for Newcrest on an annualized basis. The increase is driven by higher gold production from its 38.5% and 40% stakes in the Nevada Gold Mines and Pueblo Viejo joint ventures with Barrick, respectively, Lihir, Penasquito and its mines in Ghana. About 70% of Newmont’s midcycle production in 2027 comes from the U.S., Canada, Australia, and Ghana. In aggregate, the company sits around the middle of the cost curve but we expect some improvement. However, on top of USD 500 million in annual synergies from the acquisition, Newmont is also targeting around USD 2 billion in proceeds from the likely sale of some of what it views as its less attractive assets. We also think the company will potentially reconsider mine plans and development options at various assets upon bedding down the acquisition.
Top Canadian Gold Stock Picks Right Now
According to Mills, Newmont is the cheapest stock right now.
"Newmont and Barrick remain around 24% and 16% below our respective fair value estimates. We think the discount is mainly due to disappointing gold production so far in 2023, which has contributed to elevated unit cash costs. However, we think production will recover, helping lower unit cash costs and improve margins,” he says.
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