Investing in gold via the stock market is relatively simple and straightforward. Unlike buying physical gold, security and storage are not a concern when buying the best gold stocks.
In fact, some of the top gold stocks even outperform physical gold. You see, gold mining companies that operate efficiently are able to produce gold at significantly lower prices than spot gold. Since their operating expenses are rather stable, a spike in the price of gold should mean greater profits for the gold mining producer because they’re able to sell gold at a better price.
As an investor you have several choices when it comes to gaining exposure to gold via the stock market. That said, many of the best gold stocks have similar characteristics and goals.
What The Best Gold Stocks Have In Common
Low-Cost Operations
Direct mining is the most expensive cost that gold miners deal with. This is followed by mine development and expenditures. Sustaining Cap-ex is another large expense that gold producers face.
By utilizing technology and increasing efficiency, gold miners can reduce their operating costs. The lower their costs the less sensitive they are to declining gold prices.
For example, in 2015, Barrick Gold Corporation (NYSE: ABX) had all-in costs of $514 an ounce for their Lagunas Norte property.
In 2016, Agnico Eagle Mines Limited (NYSE: AEM) had payable gold production totaling 1.66M ounces of gold, had all-in sustaining costs of $824 an ounce, on a by-product basis.
Randgold Resources Limited (NASD: GOLD) had total cash costs of $1,006 an ounce for the first nine months of 2017, 5% lower than the corresponding period of 2016.
Having Little to No Debt
Many of the best gold stocks offer investors an annual dividend. In order for that to occur, they need to have cash on hand and keep debt levels low. Buy gold stocks that offer dividends can be an attractive way to gain exposure to the gold market and generate income at the same time.
For example, Newmont Mining Corporation (NYSE: NEM) closed 2017 with a quick ratio of 4.20. The quick ratio measures the dollar amount of liquid assets for each dollar of liabilities. In this case, Nemont has $4.20 of liquid assets available each $1 of current liabilities. In 2016, the company grew its cash on hand to $2.8B and retired $1.6B in debt.
That same year, the firm returned $67M in dividends to shareholders.
Cash is also needed to start and develop new projects. Increasing production is always a goal, and having the cash on hand makes it easier to accomplish.
Offer A Dividend
Nine of the ten largest gold companies give their investors dividends. For example, Randgold Resources Limited (NASD: GOLD) gives its investors an annual dividend of $1 per share. Not only can you benefit from the potential rise of gold, the firm will also give you $100 for every 100 shares you own.
Source: Randgold Resources
Diversified Portfolio
Many of the top gold stocks have several assets spread across the globe. Diversity is important for many reasons. Some properties are able to produce gold at very low costs, while others may be too expensive and eventually the site gets closed down.
In March 2017, Franco-Nevada Corporation (NYSE: FNV) had a precious metals portfolio that consisted of assets in the following stages: 41 producing, 34 advanced, and 135 exploration.
The gold royalty and streaming company is recognized as having the largest and most diversified portfolio of assets. These assets span across the United States, Canada, Mexico, Peru, Chile, and Africa.
Sandstrom Gold Ltd. (NYSE: SAND), like Franco Nevada, is a gold streaming and royalty company. The firm has acquired a portfolio of 174 streams and royalties, of which 21 of the underlying mines are producing.
Source: Sandstorm Gold Ltd.
Sustainability
The top gold stocks are companies that have assets stretched across the globe. It’s important when they enter a new geographic region that they give back to the community and not just use the area just for its resources.
For example, Newmont Mining Corporation (NYSE: NEM) has been giving back to the people of Cajamarca for more than two decades. Its Yanachoda operation has helped improve the water conditions, education, and economic development.
The operation built 18 schools, and has established 125 educational institutions and 280 school libraries. In 2016, Newmont invested approximately $16M globally in 2016 to support a wide range of community investments.
In a time were human rights activism is on the rise, gold mining companies can’t cut corners when it comes to health, safety, human rights, the environment and social responsibilities.
The top gold mining companies are ethically conscious.
Where You Can Find The Best Gold Stocks
Gold stocks only have a few categories. They consist of: senior gold miners, junior gold miners, royalty and streaming companies.
Senior gold mining companies have a large market cap, general exceeding $3B.
For example, As of December 31, 2016, Newmont Mining had proven and probable gold reserves of 68.5M ounces. The firm has operations and advanced development projects on four continents in five countries. It’s sales exceed several billion dollars consistently for some time now.
On the other hand, a junior mining company generates little to no revenue from producing gold. They are mainly developmental companies that explore for new gold.
Since these firms are not generating a great deal of revenue from production they are vulnerable to liquidity events. For example, Banro Corporation, formerly traded on the NYSE and TSX, the company struggled with debt. Its liabilities to current assets ratio hovered around .30.
Given its financial condition, investors bailed out of the stock as it saw its share value cut by more than 94% in 2017. Trading at $0.11, the NYSE suspended trading on the stock in December 22, 2017.
That said, trading junior mining gold stocks can be very volatile and risky. However, when gold performs well, junior miners tend to do even better.
Another type of gold stock is royalty and streaming companies. These firms don’t operate any mines, develop projects or explore. Their role is more of that of a bank, they fund mining companies to explore, develop, and produce gold.
It will receive royalties on what its investment produces.
The two main types of royalties are revenue-based royalties and profit-based interest royalties.
A revenue-based royalty is calculated from the value of gold production from a given project. A profit-based interest royalty is derived from the operating profit as defined by its contract.
Streams are metal purchase agreements that provide, in exchange for an upfront deposit, the right to purchase all or a portion of gold produced from a mine at a fixed date.
An example of a gold royalty and streaming company is Sandstorm Gold. In 2009, the company had only 3 gold streams in its portfolio. Fast forward to 2017, and it had 164 streams and royalties.
Final Thoughts
Gold stocks give investors a chance to gain exposure to the gold market. The best gold stocks have proven to outperform gold. Whether you’re researching senior gold miners, junior gold miners, gold royalty and streaming companies, make sure to properly vet them before deciding to invest.
