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Gold Fields: A deep discount for an organic growth story - Seeking Alpha

Thursday, 17 December 2020

Summary

It's been a volatile few months for the Gold Miners Index (GDX), but while the senior gold producers, for the most part, have held up relatively well, Gold Fields (GFI) has taken a beating. Despite just a 14% correction in the gold (GLD) price, Gold Fields is down more than 40% from its highs, significantly underperforming its benchmark. This is although the company is one of the only million-ounce gold producers with strong organic growth, with Salares Norte set to be a game-changer for the company. Given the more than 40% off-sale, which has pushed Gold Fields to below 7.5x FY2021 annual EPS estimates, I see the stock as a steal at current levels.

Gold Fields is one of the top-performing million-ounce producers in 2020, with a 36% return, lapping an incredible 88% return last. However, the stock has fallen out of favor over the past couple of months, as a few of the African gold producers like Harmony Gold (HMY), Galiano Gold (GAU), Resolute Mining (OTCPK:RMGGF), and Gold Fields have been hit much harder than their peers. However, it's important to note that Gold Fields is one of the only companies in this peer group with costs below the industry average and a jurisdiction profile that's actually not all that heavily weighted to Africa at all.

In fact, gold-equivalent production from Australia and Peru came in at more than 1,207,000 ounces in FY2019, with these jurisdictions ranked 1st and 25th, respectively, out of 80 mining jurisdictions worldwide. This translated to 55% of the 2,195,000 ounces produced in FY2019, making the stock a Tier-2 jurisdiction producer, not a Tier-3 jurisdiction producer that it often gets lumped in with. Finally, Gold Fields is not a high-cost producer by any means. In terms of FY2019 costs, Harmony Gold, Galiano Gold, and Resolute Mining had average all-in sustaining costs of $1,112/oz in FY2019, more than 20% above the industry average. Meanwhile, Gold Fields costs were 10% below the industry average at $897/oz. In summary, while Gold Fields certainly loses points for having 45% of its production coming from South Africa and Ghana, the company is an industry leader. Generally, it's quite rare for an industry leader to sell off over 40%, even during a sector-wide correction.

If we look at the chart above, Gold Fields has not grown its annual gold production in years, which is one reason why the stock may trade at a relatively deep discount to peers. However, it's clear that gold production is expected to increase considerably in FY2023, with its Salares Norte Project in Chile currently under construction. Based on conservative estimates, Salares Norte should pour first gold by Q2 2023 and produce over 300,000 ounces of gold that year. Once production ramps up to full capacity, we should see over 550,000 ounces of gold produced in FY2024. This translates to a 5.7% compound annual production growth rate for Gold Fields, one of the highest growth rates among million-ounce producers.

More importantly, however, Chile is ranked 17th among over 80 mining jurisdictions globally, which means that Gold Fields will get more of its output from Tier-1 assets. This will push Gold Fields' total output from Tier-1 jurisdictions from my estimates of 52% in FY2020 to 67% in FY2024, meaning that Gold Fields' production growth coincides with an asset that should increase Gold Fields' investment attractiveness relative to its peers. Finally, Salares Norte is expected to produce gold for below $600/oz, so Salares Norte should be accretive on a margin basis as well. In fact, if the company's new mine can perform as expected, Gold Fields' costs should drop below $900/oz going forward and could even drop to $850/oz for Year 2 and Year 3, where production is expected to be the highest (600,000~ gold-equivalent ounces per year from Salares Norte). In summary, the Gold Fields we see today will look like a completely different company if this project can be integrated without a hitch.

Even though Gold Fields is one of the few million-ounce producers with sub $950/oz costs (pre-COVID), and at least 50% of production coming from Tier-1 jurisdictions, the company trades at a massive discount to its peers. As shown below, Gold Fields is set to grow annual EPS by 260% this year ($0.72 vs. $0.20) and is expected to lap that growth with another 50% year in FY2021. This makes Gold Fields one of the highest growth names in the US Market currently with a compound annual EPS growth rate of 85% between FY2020 and FY2022 ($1.26 vs. $0.20). Even if we use the prior multi-year peak in annual EPS, which was $0.25 in FY2016, the stock is set to put up 30.9%~ compound annual growth in EPS, a figure that is in line with most high-octane growth stocks. Importantly, this does not include Salares Norte, which won't contribute until Q2 2023. However, Gold Fields trades at just 7.20x~ FY2021 annual EPS estimates.

One could argue that there's no reason a cyclical stock like Gold Fields should trade at an earnings multiple of 30-40 like the best growth stocks, and I would absolutely agree with this statement. This is because most high-octane growth stocks have much higher margins (70% plus), and they do not have a finite amount of their product to sell. Conversely, gold miners can run out of reserves. Most companies will within 15 years if they don't replenish these reserves organically through exploration or acquire other companies and take over their reserves. However, even if we apply a deep discount given that Gold Fields is a cyclical investment and give the stock a forward P/E ratio of just 10, the stock's price target is sitting at $12.40 (10 x $1.24), nearly 30% above today's levels. In summary, the stock is dirt-cheap and being zero respect for its future growth and improving jurisdictional profile. Let's see how the technical picture looks:

While the past couple of months have certainly been ugly, with Gold Fields sliding beneath its 200-day moving average, it's worth noting that this correction hasn't harmed the bigger picture. In fact, Gold Fields is sitting right on its monthly moving average and looks to be building a handle to a nearly 10-year cup base. Assuming the stock can hold the $8.00 level, this is a very bullish setup, especially because the past four months have allowed the stock to relieve its prior overbought condition. Therefore, as long as the bulls can play defense at $8.00 on a monthly close, the long-term picture has seen minimal technical damage.

While the recent correction in Gold Fields has been quite violent, the fundamental picture remains intact. This is because investors are getting a miner with over 50% of its production from Tier-1 jurisdictions, a 1.50% dividend yield, and a 5% plus compound annual gold production rate with industry-leading margins. Despite this investment proposition, the stock is on sale for less than 7.50x FY2021 annual EPS estimates. For this reason, I believe this deep correction in the stock remains a buying opportunity, and I may look to start a position in the stock before year-end.


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