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Golf Fields has quietly bucked the downtrend in many gold mining companies during 2021 and early 2022. Friday's monster volume/price spike in gold bullion and related mining concerns could signal the breakout gold bugs have been patiently waiting to arrive since the August 2020 peak in precious metal investments. If previous cycle performance repeats, Gold Fields leading relative strength position could help produce a better than industry average gain during the new year.
The company has long-life reserves, is diversified with producing assets in Africa, Peru, Australia (and soon Chile in 2023), holds a total cost profile below industry norms, retains a low valuation on earnings and sales, plus pays a decent dividend yield. Assuming gold and copper prices continue to climb this year, Gold Fields (a South Africa company with a New York ADS listing) may be primed for well above-normal stock market returns, especially when measured against the real possibility of a fading S&P 500 price level (as record overvaluations and retail investor participation correct).
Below are operating highlights from the September earnings report, including slightly lower debt vs. a year earlier, and steady growth in ounces mined.
Gold Fields 2021 Q3 Report
At the current and projected 10-year gold production rate of 2.0 to 2.5 million ounces annually, the company owns at least 20 years of identified economic reserves (using a US$1300 price cutoff at the end of 2020), with the potential of 30-40 years if gold prices move considerably higher than today. Below is a summary of in-ground reserves/resources and production in 2019-20.
Gold Fields 2020 Annual Report - Resources
Industry Comparisons
Operating business returns are quite high vs. other major miners in the world, yet the stock remains on the lower end of the valuation spectrum. This setup is one reason the stock continues to outpace comparable total returns for investors in the precious metals mining industry during the past three years.
To start my analysis, I am drawing final profit margins on sales and Gold Fields' superb return (earnings) on equity (book value). Both statistics are nearly leading out of the large-capitalization peer miner group. For this sort list, I am including Anglogold (AU), B2Gold (BTG), Barrick Gold (GOLD), Newmont (NEM), Agnico Eagle (AEM), Kinross Gold (KGC), Yamana Gold (AUY), and Newcrest Mining (OTCPK:NCMGF) (OTCPK:NCMGY).
You would think robust levels and rates of profitability would bring a valuation on earnings at the high end of the spectrum vs. peers. But that is not the case for Gold Fields. Below are graphs of trailing and forward projected P/Es vs. the sort group.
You would also expect the price to sales ratio to be elevated vs. the industry. Again, this is not the case as price to sales is well under most peers at 2.5x. In addition, this number remains at an almost unbelievable discount to the S&P 500 ratio of 3x sales today. Trading gold-backed assets for over 30 years, major miners generating a profit, have nearly always been valued at a sizable price to sales "premium" to the S&P 500. (From my experience, the 2021-22 valuation for gold miners in general on all kinds of fundamental metrics is something of a head scratcher.)
Lastly, when we include total debt minus cash for the major gold miners, and add this number to equity market capitalization, the enterprise value vs. EBITDA ratio for Gold Fields is amazingly low. Considering this calculation has averaged a premium setting vs. the typical S&P 500 business over the previous 50 years, being able to buy this name at 4.7x is nowhere near the equivalent blue-chip business in America trading closer to 17x EV to EBITDA!
Technical Chart Upswing
Gold Fields' record undervaluation has been working itself out slowly over the past three years through a rising stock price to better account for reality. Below are 3-month to 3-year charts of total returns (price change plus dividends) for the largest gold miners and the SPDR S&P 500 ETF (SPY). Gold Fields has been a top performance choice.
The part of the chart pattern story I am most excited about is Friday's breakout move in gold assets. The SPDR Gold ETF (GLD) is pictured below on a 22-month chart with its huge volume and price breakout above several trendlines last week.
Gold Fields has equally leaped above a line drawn through previous high trades since September 2020. The stock is now above its 50-day and 200-day moving averages, while outperforming the S&P 500 index over the past several years by +22%.
Low 14-day Average Directional Index scores could also be foretelling a short-term price bottom is in place. Similarly low ADX scores have been good buy points, more often than not, circled on the chart. My read of the technical trading pattern is Gold Fields may be primed and ready to rise strongly, following gold prices higher. If a rush of gold asset buying plays out, I fully anticipate this name will be a solid gainer for investors.
Final Thoughts
There is just so much Wall Street pessimism about gold's future from $1850, it's as if nobody thinks a substantial upmove in the precious metals is possible from here. For some odd reason, investors are OK with cryptocurrencies skyrocketing in price by 1000% or 2000% and the stock market rising 100% over three years. It seems reasonable for commodities like crude oil, copper, lumber, grains and others to double and triple their pandemic sell-off lows. Yet, gold and silver are not allowed to rise more than 30% or 40% over same time periods?
Gold's odd undervaluation situation is not logical, and may soon be rectified through an upward reversion-to-the-mean move in gold/silver/platinum prices to catch up with other assets. From my research and the use of relative asset valuations, on top of an understanding of the positive effect of out-of-control Federal Reserve money printing, gold's underlying "fair value" is likely approaching US$3000 by early 2023. I have explained the history of gold's worth as a function of inflation, debt levels and money printing over many years on Seeking Alpha, with a good writeup in September here looking at some of the latest data.
The growing disconnect in valuation and sentiment for gold assets is what could drive a double or triple in Gold Fields the next 12-24 months. If you want a contrarian unloved asset class to own, with sound valuations backing up your money, that has worked well as a defensive inflation hedge over thousands of years, gold bullion, gold miners, and Gold Fields in particular are areas of the financial market to concentrate your energy and attention.
Friday's high-volume gold buying and apparent price breakout are signals a bullish run for the precious metals could begin any day (perhaps as a flight-to-safety idea during the Ukraine/Russia crisis, with expanding chaos in the financial markets). If you will, gold miners are the antithesis of the overvalued, slowing-growth Big Tech names "everybody" wanted to own a few months ago.
Even Seeking Alpha's Quant Ranking argues the company is a well above-average pick to consider for ownership. SA's screens of upside trading momentum and financial performance vs. Wall Street analyst expectations puts Gold Fields in a Top 10% position for the gold mining industry, and Top 13% rank out of a universe of 4000+ stocks in America.
Seeking Alpha Quant Rank - GFI - February 12, 2022
A final note for the dividend income crowd, major gold miners are shelling out some of their free cash flow as quickly rising cash distributions to shareholders in 2020-22. The 3.1% trailing dividend rate for Gold Fields on an $11 quote was greater than the entire Treasury market yield curve, and more than DOUBLE the S&P 500 dividend yield of 1.3%. The really bullish news is any significant upmove in gold will support dividend raises in future years, helping miners like Gold Fields to deliver truly unique and high cash payouts, backed by the safest gold assets in the world.
A US$3000 an ounce gold price, if my modeling proves correct, could easily support a huge jump in shareholder worth in the precious metals mining industry during the next 12-24 months. I suggest smart investors overweight monetary metals in their portfolios with a minimum 10% exposure right now, to as high as 20% for those desiring a serious inflation and money printing hedge for their net worth. A strongly diversified list of gold/silver/platinum assets should include Gold Fields in portfolio construction.
What could go wrong? The biggest risk for Gold Fields is several operating assets are located in less-than-ideal nations for mining law. Changing accounting rules, tax rates, and demands on foreign ownership in places like Peru, with a sometimes unstable operating backdrop in South Africa explain outsized theoretical jurisdiction risk vs. the safer majors with a North American focus. This asset location issue is one reason for its discounted valuation. However, the marketplace appears to believe the current discount is too great, and such logic has been a factor in its outperformance streak.
Another risk is a stock market crash of 30% to 50% during early 2022 could drag down the GFI stock quote for a spell. Large and dramatic liquidity crunches like 1929 or 1987 have likewise put selling pressure on gold mining equities. Yet, a year or two following these events, gold miners have proven a top group to own.
I am modeling a $20 price target for GFI by the end of 2022, assuming gold trades above US$2500 an ounce. Using $3000 gold and $5 copper, Gold Fields could trade closer to $30 per ADS share. The downside appears to be very limited. A drop below $10 in coming weeks, related to selling any and all assets on Wall Street, may create a great long-term buy opportunity.
Of course, a lower gold/copper price regime would cause the stock quote to fall. If you are honestly bearish on gold and copper, I can understand if you choose to avoid GFI. I will say, it makes little sense to me to forecast lower metals pricing, unless you are also incredibly bearish on the stock market and financial system liquidity generally. If you are bullish on U.S. equities and bearish on gold today, I don't think you are looking at their setups rationally, intellectually or independently with the correct history lens.
