The famous Dow to gold ratio is trending above 15, suggesting investors might want to look towards gold and precious metals miners in the coming quarters. The Dow to gold ratio measures the units of gold required to buy the Dow Jones Index, and historically, investors have tended to opt for gold whenever the ratio tops 15.
Source: Macro Trends
Although the Dow to gold ratio's statistical significance is questionable, the SPDR Gold Shares (GLD, Financial) ETF's positive six-month return suggests the anomaly is taking full effect at this time.
Furthermore, validity can be added to a bullish gold price argument as the U.S. yield curve is currently downward sloping, indicating that benchmark interest rates could settle lower within the coming years, in turn softening the U.S. dollar and providing support to gold.
With the outlook for gold appearing solid based on the above factors, here are two of my favorite "best-in-class" gold mining stocks.
Barrick Gold Corp
In addition to being the world's second-largest gold producer, Barrick Gold Corp. (GOLD, Financial) is one of the most sought-after gold mining stocks due to its steady value accumulation. The company's CEO, Mark Bristow, is considered one of the best CEOs in the business as his low-debt and lean acquisitions mandate is highly regarded by many market participants.
Recently, Barrick beat its third-quarter earnings estimates by two cents per share. In addition, the company dominated its revenue midpoint estimate by $61.42 million amid supportive gold prices.
Furthermore, the company made significant strides in 2022 by expanding its capacity with extension projects at Pueblo Viejo pertaining to a tailings facility. Tailings is a lucrative business in view of the fact that dump site mining is known for its illustrious profit margins. On top of that, Barrick is actively seeking new exploration opportunities within the copper space, which could lead to valuable economies of scope.
Although input costs were a problem during 2022, Barrick managed to maintain an operating margin worth 33.66%, allowing it to reward its shareholder with $1.2 billion in the form of dividends and share buybacks.
The company anticipates that baseline input expenses will recede in 2023 due to lower fuel costs and a loosening labor market, which could bolster Barrick's profit margins even further. Regardless of its potential income statement benefits, Barrick's stock looks undervalued on the premise that its price-book ratio of 1.43 is below its normalized average. In addition, the stock hosts a respectable forward dividend yield of 2.87%, adding to its total return prospects.
AngloGold Ashanti Limited
AngloGold Ashanti Limited (AU, Financial) provides a pivot opportunity. The company recently decided to turn its attention to surface mining endeavors. The pivot away from an underground-centric portfolio presents enormous cost-cutting possibilities, which could result in significant residual value for common stockholders.
Similarly to Barrick Gold, AngloGold Ashanti beat its third-quarter earnings estimates and maintained its full-year guidance. Ashanti posted quarterly Ebitda worth $472 million, accumulating to a 5% year-over-year gain. Even though the company's production jumped, its higher throughput was mostly bound to higher grades across most of its assets.
In addition to the company's impressive third-quarter Ebitda, it added free cash flows of $169 million, which is a 10-fold year-over-year increase. Yes, you read that correctly; Ashanti's free cash flow surged by 1,000% since its third quarter of 2021!
AngloGold Ashanti's profit margins are robust, as illustrated by its operating margin of 18.48%. Moreover, the enterprise's return on invested capital of 9.03% suggests that it utilizes its working capital with optimal efficiency, ensuring its shareholders receive full value for their investments.
Key metrics suggest that Ashanti's stock is undervalued as it trades at an enterprise value to Ebitda ratio of merely 7.12. Into the bargain, the stock is on a six-month cross-sectional momentum trajectory and exhibits a respectable forward dividend yield worth 1.97%.
Potential risks
The word on Wall Street is that the U.S. might enter a recession in the third quarter of this year, which could diminish precious metal stocks' prospects.
Despite key indicators aligning toward a gold bull market, recession risk remains a key element that most investors ought to be concerned about. A weakening U.S. dollar and a favorable Dow to gold ratio could still provide mining stocks with price support. Nevertheless, a deep recession could hinder gold miners' prospects as they are bound to a highly cyclical industry.
Lastly, gold prices have received little support during the past decade as alternative asset classes such as cryptocurrencies have emerged. Thus, utilizing age-old indicators to establish a bullish bet on gold might lack validity.
Concluding thoughts
Key indicators imply that gold miners might experience a rally in 2023. However, investors that concur with the narrative need to be selective as the industry's embedded costs are often unfavorable.
Based on my analysis, the likes of Barrick Gold and AngloGold Ashanti present the most compelling residual value prospects as they host robust income statements, attractive valuation metrics and lucrative dividend yields.
