Precious metals investors have had quite the year, with the price of the yellow metal recently surging above the $3,500 level. Now, gold prices have come down somewhat of late. But for investors with a long-term investing timeframe and concerns around inflation, having at least a portion of one’s portfolio allocated toward gold and other precious metals seems like a good idea.
One of the top Canadian gold miners that’s benefited from this surge in commodity prices of late is Kinross Gold (TSX: K).
Let’s dive into whether this stock’s better than 60% rally last year can be sustained moving forward.
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It’s all about gold prices
For gold miners like Kinross, surging gold prices result in amplified earnings growth, particularly over extended bull market rallies. That’s mostly due to the fact that major mining operators such as Kinross finance their up-front costs using dollar-denominated debt. These companies then pull in revenue, which is directly impacted by gold prices, so the amount of operating leverage these companies provide investors to the price of gold is tremendous.
As the price of gold continues to move higher, say by 10% over a given timeframe, a gold miner like Kinross might see their earnings grow 20% or 30% over that same timeframe. And as their cash flow surges, Kinross and its management team can devote that capital to paying down debt or issuing a larger dividend. In either case, investors win.
What do the numbers say?
Overall, Kinross’ recent earnings results were about as good as investors could have hoped for. Earnings per share surged to $0.44 from $0.14 a year earlier, a roughly 3 times increase in the span of a year. Again, that’s the impact of operating leverage in a rising commodity price environment for investors who have held steady over this timeframe.
And while K stock surged 62% last year, it’s also true that this stock has rallied even harder during the first half of this year. This has led to a more than 115% rise over the past 12 months, which one might think would impact the company’s valuation.
That said, at just 15 times trailing earnings, Kinross still looks cheap here. In my view, this is a Canadian mining stock investors should continue to hold, and potentially add to if we see additional near-term volatility. I remain bullish on gold long term, and Kinross is a great way to play this trend in my opinion.
