Many investors often wonder if it’s better to invest in a gold mining company or a gold ETF. And if it’s the former, what are the best gold mining stocks?
Gold companies primarily focus on the exploration, mining, and processing of gold. When you invest in a gold stock, you’re not only investing on the future performance of gold but also in the management of the company.
Generally, the expected returns on a gold ETF should be similar to that of gold bullion. With an ETF, you don’t have to worry about any corporate scandals or anything else harmful that could damage the price of your stock.
However, if you’re able to find the best gold stocks, returns can be greater than owning physical gold or an ETF.
Two Types Of Gold Mining Stocks
Major Mining Company: These are well established mining companies that produce high amounts of gold and growing their reserves. Many of them offer dividends to investors. Their concerns are on keeping costs low and improving efficiency.
Junior Mining Company: These consist of companies that are generally in a developmental stage. They may produce little to no gold. Instead, their focus is on exploring and finding deposits of gold. From a trading perspective, gold junior mining stocks are more volatile than major mining stocks. This is mainly due to the uncertainty surrounding its business. Since they are not producing yet, they rely heavily on financing to get them through the developmental stage.
What The Top Gold Mining Stocks Have In Common
Investing in the right gold mining company offers more upside and greater returns than owning physical gold or a gold ETF. In most cases, gold miners have their production costs set. If gold prices spike the gold miner should see greater profits because its production costs have not really changed.
The best gold mining stocks find ways to increase production and grow reserves while finding ways to reduce production costs.
They want to take advantage of free cash flow. Free cash flow is the cash that a company generates after spending the money required to maintain or expand its asset base.
The best gold mining companies try to avoid mining areas that have a high degree of political or environmental risk. In addition, they want to have little to no debt in their business.
The Biggest and Best Gold Mining Stocks
Franco-Nevada Corporation (NYSE: FNV): This company gives investors a unique way to play the gold mining sector. You see, they are a gold royalty and streaming company.
They receive royalties from gold miners who develop and operate from their property.
In addition, they are involved in streams. Streams are metal purchase agreements that provide, in exchange for an upfront deposit, the right to purchase all or a portion of one or more metals produced from a mine at a preset price.
The firm believes this gives them less exposure to operating risks.
Franco-Nevada has a diversified portfolio that stretches across the globe and in multiple-asset classes.
Source: Franco-Nevada Corporation.
The majority of the firm’s revenue comes from its gold assets that are located in the Americas. The company also rewards investors by giving them a dividend yield of 1.17%
Goldcorp Inc. (NYSE: GG): The firm acquires, explores for, develops, and operates precious metals properties. Assets are located in Canada, the United States, Mexico, and Central and South America. It only explores for gold, but also silver, lead, zinc, and copper deposits.
The company’s goal is to produce three to four million ounces of gold from six to eight large-scale districts by 2021.
Source: GoldCorp, Inc.
With a market cap exceeding $10B, Goldcorp is one largest players in the game. Income investors will be happy to hear that they give a dividend of $0.63%
Newmont Mining Corporation (NYSE: NEM): The only gold producer that is a member of the S&P 500 index. Newmont is the largest gold mining company with a market cap that exceeds $20B.
Their operations span across the globe, with operations in Africa, Australia, North America and South America.
The company primarily acquires, develops, explores, and produces gold. It also explores for silver and copper. As of December 31, 2016, Newmont had proven and probable gold reserves of 68.5 million ounces and an aggregate land position of approximately 23,000 square miles.
It’s CEO, Gary Goldberg was inducted into the American Mining Hall of Fame in 2017. The company stock gives investors a dividend that yields $0.80%
Barrick Gold Corporation (NYSE: ABX): The company engages in the exploration and development of mineral properties. Assets are located in the United States, Canada, Australia, Chile, Peru, the Dominican Republic, Papua New Guinea, Tanzania, Zambia, and Saudi Arabia.
It primarily explores for gold, copper, and nickel deposits. As of December 31, 2016, it had proven and probable gold reserves of 85.9M ounces.
Source: Barrick Gold Corporation
Barrick Gold is the second largest gold mining company based on market cap. They offer a 0.82% dividend yield to investors.
Gaining Exposure To All These Gold Miners
The VanEck Vectors Gold Miners ETF (NYSE: GDX) is an ETF that invests in solely in gold mining companies. Its top six holdings are: Newmont Mining Corp, Barrick Gold Corp, Franco-Nevada Corp, Newcrest Mining Ltd, Agnico Eagle Mines Ltd, and Goldcorp Inc. It also offers investors a dividend yield of 0.22% but has an expense ratio of 0.51%.
The gold miners ETF will give you exposure to the sector, as well as diversification in the space. However, greater gains can be made by selecting the best gold mining stocks. For example, Franco-Nevada Corporation’s outperformed GDX by three-fold in 2017.
Technology will play a key role in this space moving forward. Companies who invest in the right technology will allow them to reduce costs in the future and become more efficient.
It’s also important to read company filings and understand their projects. Some projects are very sensitive to the price of gold, it could mean the difference between a profit and a loss.
The best gold miners all want the same thing: grow reserves, cut costs, improve efficiency, and operate at a free cash flow. The companies mentioned today are among the best in class.