Gold Miners Poised for Strong Performance as Free Cash Flow Increases
The gold mining sector is experiencing an exciting resurgence, and the recent trend in gold prices indicates that we’re on the verge of an even more exciting time for miners the coming months. After a strong second quarter, I expect the third quarter to be even better for gold miners, thanks to the continued strength in gold prices and subdued cost inflation. If prices remain at current levels, miners will generate substantial free cash flow as we head into the fourth quarter.
Why Now is an Opportune Time to Buy Gold Miners
One of the key factors driving my optimism is the significant free cash flow miners are positioned to produce. For investors looking to capitalize on this trend, I believe now is an ideal time to buy gold mining stocks. With the robust cash flow expected in the near future, many miners are on track to meet their target net debt levels by year-end. This creates a solid financial foundation for the next phase for miners.
Dividend Growth and Market Differentiation
Looking ahead to 2024, I anticipate that gold miners will use their growing cash reserves to raise dividends or pay out special dividends. When this happens, I believe the market will start to recognize the value of gold mining stocks compared to physical gold. While physical gold provides a hedge against inflation, gold mining stocks will not only offer that hedge but also the potential for income generation, which could make them a more attractive investment than physical gold.
Overcoming a Tough Bear Market
The gold mining sector is coming out of a difficult bear market, but things are looking up. There’s always some level of geopolitical risk, particularly the possibility that host countries may try to capture more of the profits. However, I don’t believe this is a near-term threat, as it doesn’t seem to be a priority for most host nations at this time given the difficultly that many miners had maintaining operations and employment during COVID.
A Turnaround Story in Newmont
One gold miner that I believe is particularly undervalued right now is Newmont Corp (as of 9/25, Newmont Corp is the largest holding Gabelli Gold Fund). In my view, Newmont is a turnaround story that’s already generating free cash flow. As the first wave of generalist investor interest returns to the sector, I expect much of it to flow into names like Newmont, which has strong fundamentals and significant upside potential.
Overall, the outlook for gold miners is bright. With rising free cash flow, the potential for dividend increases, and undervalued opportunities like Newmont, the sector offers compelling investment opportunities as we head into the next year.
