Gold prices hit a six-week high – So why are major gold miners lagging?

Gold's upward trajectory is expected to persist throughout the year, driven by a broad range of factors including macroeconomic uncertainty, escalating geopolitical tensions and a turnaround in institutional allocations.

Gold emerged as a top-performing commodity in the first half of 2024, up around 13%. However, major local gold miners such as Newmont, Evolution Mining and Northern Star have failed to keep pace with the underlying commodity, underperforming over the same period.

Mid-to-Large cap gold performance

The below list observes the performance of gold stocks above $500 million market cap.

Share price performance for the six months ended Friday, 5 June 2024

Value you can't ignore

The top performing gold miners are both based in Africa.

West African Resources is an emerging mid-tier gold producer targeting 400,000 ounces of gold per annum from its Sanbrado Gold Mine and Kiaka Gold Project in Burkina Faso.

Resolute operates the Syama Gold Mine in Mali and the Mako Gold Mine in Senegal. The company's gold production and cost guidance for 2024 is 345,000-365,000 ounces at an all-in sustaining cost of $1,300-1,400 an ounce.

Despite the solid track record for both companies, they tend to trade at a significant discount relative to peers due to the perceived risks associated with their African operations. If you look at Mali, they've had two military coups in the past couple of years as well as sanctions and border closures.

Too add some perspective about the valuation gap, here's Macquarie's FY24 EV/EBITDA estimates:

• Evolution Mining: 6.3x

• Northern Star: 8.3x

• West African Resources: 4.1x

• Resolute Mining: 2.1x

The stark contrast in multiples underscores the market's cautious stance on African-based operations. Investors often view these stocks through a lens of "all's well until it isn't," justifying some degree of valuation discount.

However, this raises a compelling question: At what point does the potential upside of surging gold prices outweigh the perceived geopolitical risk, making these discounted valuations too attractive to ignore?

If we take a closer look at West African Resources, Macquarie is forecasting the follow numbers for FY24:

• Revenue up 9.3% year-on-year to $720 million

• EBITDA up 12.7% to $381 million

• Reported NPAT up 27.9% to $188 million

• Cash outflow of $171 million to fund the development of Kiaka

• Cash flow is expected to be negative in FY25 (-$151m) but turn positive from FY26 (+$376m) onwards

• The above financial assumptions assume gold spot prices of US$2,276 in FY24, US$2,425 in FY25 and US$2,200 in FY26

Now let's compare this with a local name like Evolution Mining, which has a lot of work cut out for several projects (approx $400-600 million per annum from FY22-28). Macquarie expects the company to report the following free cash flow:

• FY24: -$205 million

• FY25: $417 million

• FY26: $318 million

Both companies are forecast to deliver similar free cash flow in FY26 but Evolution's market cap is approximately 5 times larger than West African Resources.

"Cowal and Northparkes are both meaningful operations for Evolution, but meaningful capital is required for their next phase," Macquarie said in a note dated 24 June. The analysts retained an Outperform rating and a $4.10 target price (approximately 13% upside).

As gold prices climb, the inherent leverage in these Africa-based miners becomes increasingly apparent. The valuation gap begins to narrow as their earnings profiles become more and more compelling.