The implosion of global banks in recent months has shifted capital toward safe-haven assets such as gold. Investors are wary about an upcoming recession, geopolitical tensions, and the possibility of another financial crisis impacting the equity markets in the near term.
These factors have acted as a tailwind for gold, in addition to the much-anticipated pivot of the Federal Reserve Bank, expected in the second half of 2023.
To cool down inflation, the Federal Reserve increased interest rates at an accelerated pace in the last 15 months. But quantitative tightening measures have led to the collapse of several banks in the U.S. So, there is a good chance the regulators will pivot once again and pause rate hikes this year.
Gold prices breached the US$2,000/ounce mark earlier this month for the first time since March 2022. If you expect gold prices to breach all-time highs, you can consider buying these two mining stocks and derive outsized gains.
Barrick Gold stock
One of the largest mining stocks in the world, Barrick Gold (TSX: ABX) is up 17% in the last month. A Canada-based miner, Barrick Gold operates a portfolio of Tier One assets. Typically, these assets have the ability to produce over 500,000 ounces of gold annually and have more than 10 years of productive life remaining.
In fact, Barrick Gold expects to mine 6.5 million ounces of metals annually, including gold and copper, in the next 10 years.
A solid mining portfolio is supported by Barrick Gold’s robust balance sheet. Over the years, the company has lowered debt by selling off non-core assets. With the extra cash flow, it has been able to pay shareholders a tasty dividend yield of 3%.
Analysts forecast Barrick Gold to increase adjusted earnings to $1.38 per share in 2024 from $1.03 per share in 2022. So, ABX stock is priced at 18.4 times forward earnings, which is reasonable.
Bay Street expects Barrick Gold stock to return close to 20% in dividend-adjusted gains in the next 12 months.
Franco-Nevada stock
Franco-Nevada (TSX: FNV) is a gold-focused royalty and streaming company valued at a market cap of $38 billion. It provides investors exposure to precious metals as well as commodities such as natural gas, crude oil, and natural gas liquids.
In a higher pricing environment, Franco-Nevada was able to increase revenue to $1.3 billion and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) to $1.1 billion in 2022.
The company ended 2022 with $1.2 billion in cash and $1 billion in credit facilities, providing it with enough liquidity to reinvest in growth and acquire top-tier mining assets.
Franco-Nevada expects its portfolio to produce between 760,000 and 820,000 GEO (gold equivalent ounce) in 2027, a majority of which will be precious metals as the company generates around 55% of its top line from gold.
The outlook assumes the expansion of throughput capacity to 100 million tonnes annually at Cobre Panama and production growth from the development of energy assets in the United States.
Similar to other streaming and royalty companies, Franco-Nevada is not exposed to operating cost overruns. The gold producer has leveraged its asset-light business model to generate steady cash flows and pay shareholders a dividend each year since its IPO (initial public offering) in 2008.
FNV stock is currently priced at a discount of 12%, given consensus estimates.
