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Gold Stocks Outperform: Newcrest Mining, Evolution Mining, Northern Star Resources

Gold Stocks Outperform: Newcrest Mining, Evolution Mining, Northern Star Resources
Gold prices gained more than 16% since the beginning of the year, which coincides with the downtrend in stock markets
Feb 25, 2016 By Simon Herrmann Tags: NCM, NST, EVN

Evidently most gold mining stocks have risen since the beginning of the year, including Newcrest Mining (ASX:NCM), Northern Star Resources (ASX:NST) and Evolution Mining (ASX:EVN). This is primarily due to a favourable environment for Australian gold miners, which enjoy healthy profit margins in the current gold price environment.  Financial turmoil and falling equity prices have helped fuelling gold futures which trade at the highest level in 12 months.

In our stock market analysis from 17 February, we concluded that five out of the top ten best performing stocks on the ASX 200 have exposure to the gold mining industry. Evolution Mining topped the list, with its shares rising 32.4% in 2016. Even though EVN has eased slightly since we published the list, investors have pocketed an impressive 100%+ return over the past year.

Gold prices gained more than 16% since the beginning of the year. This upsurge coincides with the downtrend in stock markets. The rise in gold prices in general is favourable to gold miners. Therefore, while rest of the market retreated, the gold mining stocks experienced a rally. Moreover, since the USD trades at a premium to the AUD, a rise in spot gold prices (in USD terms) inflates the gold prices in Australian currency. Hence an increase in the spot gold price has an amplified effect on local miners’ profit margins.

Australia’s Three Largest Gold Miners at a Glance: NCM, EVN, NST

Newcrest Mining (‘NCM’) is Australia’s largest gold miner by market capitalisation, followed by Evolution Mining (‘EVN’) and Northern Star Resources (‘NST’). Over the past 12 months EVN has outperformed its peers, while in 2016 NST has experienced the largest price appreciation as at 25th February 2016.

The table below compares Australia’s largest gold miners by market capitalisation. Please note that all data is as of 25 February 2016.

 

Results from H1FY16

NCM*

EVN

NST

Market Cap

$12.7bn

$2.7bn

$2.4bn

Revenue

$2,16bn

$607m

$425m

Profit/Loss (underlying)

$113m

$107.9m

$65m

Gold production

$1,204m oz

377.8m oz

285.5m oz

Net debt

$3,700m

$455m

-

All-in Sustaining Costs

$1,074

$954

$1,062

Gold Reserve

69m oz

5.2m oz

1.5m oz

Stock Market Return

1 Year Return

+21%

+105%

+80%

YTD Return

+30%

+30%

+42%

*NCM reports in USD. The exchange rate used in this table is 1 USD = 1.40 AUD

 

Evolution Mining is the most profitable gold miner relative to its peers. The company has the best “profit per ounce” ratio, meaning it generates the most $ per ounce of gold mined. This is supported by the lowest All in Sustaining Costs (‘AISC’). While Northern Star has excellent ratios and no debt, it has the the smallest reserve and limited mine life. The company has more A$200m in cash, thus potential to make strategic acquisitions or fund external mines.

Evolution Mining released a solid quarterly report in January and also announced its half yearly results today. The company stated that it attained a record production level for the six months to December 2015. Evolution achieved All-in Sustaining Cost of US$690 per ounce sold, which is lower than most of its peers. The industry heavyweight Newcrest Mining confirmed AISC of US$770 per ounce sold.

Newcrest Mining is by far the largest gold miner in Australia, but, as opposed to NST and EVN, has exposure to Copper and Silver. Newcrest Mining’s debt totals $3.7bn, while its gearing ratio is higher than its peers. While Newcrest’s EBITDA Margin was 35.2%, Evolution achieved a superior EBITDA margin of 47%. The company utilised its strong cash flows towards making early repayments of its debt totalling $50 million. This brought its gearing ratio to 22% (Newcrest 28%).

Wise-owl’s Take

Gold miners flourish in the current market conditions, which is one of the reasons why Wise-owl has initiated coverage for several companies with direct exposure to gold. Evolution has slightly outperformed its peers over the past 12 months as the company has strategically positioned itself to produce high grade gold at low unit costs. While Northern Star has an attractive balance sheet and Newcrest Mining offers the most diversified exposure, Evolution Mining offers a very balanced risk to reward ratio when all factors are considered. 

Wise-owl has recommended various stocks in this sector and if you are interested to read more, please sign up to our free trial.

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Simon Herrmann Author: Simon Herrmann Feb 25, 2016

Simon is a financial analyst at independent research firm Wise-owl who wants to change the world by disrupting the cliché approach to investment decision making with convergent thinking. Wise-owl’s goal is plain and simple: Find the best opportunities for our members by following a proven methodology and to create long-term value through high-quality advice, innovation, technology and education. We combine industry experience and the agile mentality of a start-up. Wise-owl is the future of stock market investing.

ASX & IPO Review for Q1 2017

The first three months of 2017 were characterised by low volatility and overall bullish sentiment. After a 4.2% gain during the fourth quarter of 2016, favourable market conditions on the ASX were sustained during the first quarter of 2017.

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