Gold is trending up.
The precious metal was at $1,344.60 per troy ounce on the London Bullion Market and at $1,349.05 per troy ounce on the Comex early on Tuesday. These both represent a roughly 3.4% increase from the cumulative average prices so far this year.
The price of gold has risen about 4.2% since the beginning of 2019, and some factors that are usually positive for the commodity suggest that it will continue higher in coming months.
Specifically, gold will benefit from lower interest rates as it becomes more appealing than bonds and fixed-income securities.
In the May meeting, the Federal Reserve said that it decided to remain patient on additional policy firming, which is also positive for gold. In fact, unaltered rates of 2.25-2.25% -- which are still below the 3.26% average rate for the last 106 years -- may lead to a low real interest rate environment if prolonged for several sessions.
But a lower-than-expected U.S. annual inflation rate of 1.8% reported in May has increased the number of economists who think that the U.S. Central Bank will implement an easy monetary policy this year.
Gold investors can take advantage of a rising gold price through positions in publicly traded gold producers. For the following weeks, I suggest doing this through taking a position in Torex Gold Resources Ltd. (TORXF, Financial).
For the 52 weeks through June 17, shares of the Canadian miner, developer and explorer of gold properties increased 5%, topping the VanEck Vectors Junior Gold Miners (GDXJ, Financial) ETF by 7%.
Sell-side analysts on Wall Street have an overweight recommendation rating on the stock, meaning they are confident it will beat the industry within 52 weeks. Analysts also established an average price of $18.38 per share, which implies nearly 90% appreciation from Monday’s closing price of $9.77.
For full-year 2019, the company expects to produce between 399,900 and 460,100 ounces of gold, reflecting a 13-30% increase from its production of 354,000 ounces in 2018. If gold stays supportive, Torex will report higher revenue and earnings, which will have a positive impact on the share price. The likelihood of this is high because the company's operations are above the industry median in terms of profitability and growth.
Torex Gold Resources has an operating margin of 17.07% versus the industry median of 4.77%, a net margin of 2.48% versus the industry median of 2.31% and an Ebitda margin of 44.2% compared to the industry median of 24.5%.
Torex will produce the metal from three open pits and one underground gold deposit located on Guerrero Gold Belt in Mexico approximately 112 miles from the capital. In this 29,000-hectare area called Morelos Gold Property, the company also has a processing plant and the Media Luna deposit.
Media Luna is a mineral project for the development of a mine that is expected to produce 3.9 million ounces of gold equivalent over its lifetime at an all-in sustain cost of $619 per ounce of metal. A technical report also indicated that Media Luna has a 27% after-tax internal rate of return. This means that the project is robust; investors usually consider a project with an IRR of 30-35% as healthy.Â
Based on a net present value per share of $6.85 for the project, gold production guidance for 2019, cumulative average gold price of $1,299.97Â and 84.92 million shares outstanding, I estimate that the stock is trading near a 25% discount to Monday’s closing price.
The chart below illustrates that the share price was below the 200- and 100-day simple moving average lines but slightly above the 50-day SMA line. The market capitalization is $831.80 million. Further indications of a compelling stock are a price-book ratio of 1.09 versus the industry median of 1.62 and an enterprise value-Ebitda ratio of 5.27 versus the industry median of 8.71.
The 14-day relative strength index of 53 suggests that the stock is neither oversold nor overbought.
GuruFocus assigned the company a financial strength rating of 5 out of 10 and a profitability and growth rating of 6 out of 10.
Disclosure: I have no positions in any securities mentioned.
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