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North American precious metal stocks offer a buying opportunity, RBC says

Agnico Eagle Mines Ltd., Franco-Nevada Corp., Goldcorp Inc. and Wheaton Precious Metals Corp. were earmarked as preferred buys for investors looking to enter the North American precious metals market.

RBC Capital Markets recommended the four equities as core portfolio holdings for a basket of stocks associated with above-average growth, moderate risk and the potential to rerate higher.

"We believe investors looking for precious metal exposure should use a portfolio approach built around a basket of fundamentally sound companies," the bank said in a March 27 note.

The bank also suggested adding Alacer Gold Corp., B2Gold Corp., Endeavour Mining Corp., Kirkland Lake Gold Ltd. and Osisko Gold Royalties Ltd., which were tagged as growth opportunities, while it tipped Detour Gold Corp., Guyana Goldfields Inc., Kinross Gold Corp. and SSR Mining Inc. to have rerating potential.

Amid a disconnect between equity prices and the bullion performance, RBC said North American precious metals companies at large offered an attractive buying opportunity.

"We believe the North American listed precious metal equities offer a compelling opportunity ... given an uncertain political back-drop and changing political policies in the U.S.; increasing geopolitical tensions; rising market volatility; and growing inflation expectations," RBC's analyst team elaborated, adding that the gold price is more likely to see upside potential than downside risks in the current environment.

"While the likelihood for continued rate hikes in the U.S. appears extremely high, we believe the price of gold is already pricing in three hikes in 2018 and further hikes in 2019," the team said.

With discounted valuations of North American precious metal producers at spot prices, currently trading at 22% discount to net asset value, this provides an attractive risk/reward trade for investors, according to RBC. Relative to levels seen in 2015, the shares are also underperforming in terms of two-year sustaining free cash flow and operating cash flow.

RBC attributed this underperformance to increased operational and geopolitical risk, investors moving toward newly popular sectors including marijuana, cobalt and lithium, and blockchain, interest in base metal companies, and increased investor interest in the royalty and streaming companies.