Gold investors: 2 Companies That Look Attractive and 1 to Stay Away From

Three gold stocks that look attractive, but each have their own story. Iamgold Corp (TSX:IMG)(NYSE:IAG), Yamana Gold Inc (TSX:YRI)(NYSE:AUY), and Eldorado Gold Corp (TSX:ELD)(NYSE:EGO) all have very different challenges ahead.

| More on:
Gold bullion on a chart

Image source: Getty Images.

With Canada’s economy stalling and the possibility the country may soon enter another recession, it is only natural for investors to seek out a safe haven for their hard-earned capital. Typically, gold is one of the favourite investments, as it is acyclical and acts as a great place to store capital during times of fear and panic.

Gold also protects investors from inflation, which is a risk during financial crises when federal governments are printing money to stimulate the economy. Gold-mining stocks are always risky investments, although the payoffs are higher when the price of gold goes up, there is no guarantee an investment will pay off. Even if the price of gold does move favourably.

Investors take on a variety of different risks owning gold stocks and need to be aware before making any investment decisions. Three gold stocks, each with its own story, are Iamgold (TSX:IMG)(NYSE:IAG), Yamana Gold (TSX:YRI)(NYSE:AUY), and Eldorado Gold (TSX:ELD)(NYSE:EGO).

Iamgold

Iamgold has a lot of qualities long-term investors want to see out of a gold company. It has managed cash flow well, cutting the dividend and operating costs. The bulk of Iamgold’s production comes from three mines: one in Suriname, one in Burkina Faso, as well as the Westwood mine in Quebec. With 90% of Iamgold’s production coming from these mines, execution there is paramount.

Going forward, in order for Iamgold to increase its profitability, it needs to increase its margins. Management knows this and has been working diligently to decrease the operating costs of the mines. If management can succeed, the stock looks very undervalued at today’s prices, however; management must achieve the goals they’ve set.

It is also promising to see the new growth projects Iamgold has in the pipelines. Currently, these projects are being deferred to a better gold environment, which could end up being soon. As promising as the company looks though, the degree of execution risk the investor is taking on is high, therefore any investment should remain only a small percentage of one’s portfolio.

Yamana Gold

Yamana is more of a turnaround story. Recent sales and divestments in the last two years have given the company some financial flexibility and refocused efforts to the main mines. Decent production costs out of these main mines, which make up most of the revenues, should help produce better margins going forward.

The new Cerro Moro mine is also very important to the growth of the company due to its long-term potential. The mine has the ability to produce upwards of 125,000 ounces of gold annually. This looks promising, as long as management is able to execute to get the mine up to its potential.

Yamana also recently sold its Chapada mine, which has helped with cash flow relief but exacerbates the need to execute on existing mines. The strategy of the company to decrease net debt-to-EBITDA is on track, and this year it is looking to get it down from 1.5 times to one times. Management’s ability to deliver on their goals is key, as investors wait to see more good news to confirm the turnaround.

Eldorado Gold

Eldorado has a lot of problems that need to be resolved before it is worth investing. It sold a bunch of assets to get production concentrated to few mines, however; this has backfired slightly as legal problems with the Greek government have been causing delays.

In addition to the delays being caused by the issues with the Greek government, the problem has also tied up capital. This has caused a cash flow issue, which will most likely need to be made up by additional financing. A serious turnaround is needed before investors should consider an investment.

The bottom line

Gold can be an important part of an investor’s portfolio. Since gold companies tend to be more volatile, it is important for investors to diversify within the gold sector. Investors should buy gold-backed ETFs as well as gold stocks to mitigate the many risks that come with gold miners.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.

More on Metals and Mining Stocks

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Friday, February 3

Large-cap corporate earnings will continue to be on TSX investors’ radar today.

Read more »

stock market
Metals and Mining Stocks

Why B2Gold Stock Stands out Among TSX Gold Miner Peers

The yellow metal has gained 18% since mid-October, while B2Gold stock has soared 30%.

Read more »

Engineers walk through a facility.
Metals and Mining Stocks

Why Cameco Stock Rose 22% in January 2023: Should You Buy Now?

Cameco (TSX:CCO) stock may be up right now, but how long can that last if uranium proves to be a…

Read more »

People walk into a dark underground mine.
Metals and Mining Stocks

2 Canadian Mining Stocks Worth a Dig in February 2023

These two Canadian mining stocks are among the best options for long-term investors looking to add some defensiveness right now.

Read more »

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Wednesday, February 1

The Fed’s interest rate decision and other important economic releases may keep TSX index highly volatile today.

Read more »

stock market
Metals and Mining Stocks

Gold Prices Are Rising: 2 Mining Stocks to Buy Today

Gold mining stocks offer a great way to tap into the resilience of this shiny metal in weak markets, but…

Read more »

A miner down a mine shaft
Metals and Mining Stocks

3 Growth Stocks to Buy With $1,000 Right Now

Each of these growth stocks have climbed over 50% in just six months! And there's still room to grow on…

Read more »

A tractor harvests lentils.
Metals and Mining Stocks

Here’s Why Nutrien Stock Is 1 of my Top Stock Picks This Year

Not all food stocks are equally attractive, and if you are in this for the long haul, it's a good…

Read more »