Although the stock market has rebounded strongly since the turn of the year, the fact remains the economic environment remains uncertain as disinflation coupled with soft manufacturing numbers pose cause for concern.
An economic contraction might influence stocks in an unwanted manner. As such, it is critical that investors diversify their portfolios.
Based on my knowledge and seminal market research, gold stocks provide an excellent hedge against tail risk while also possessing the necessary attributes to perform in a bull market, allowing investors to align their portfolios with an uncertain market environment.
As such, I will discuss three best-in-class gold stocks worth considering.
Understanding the diversification benefits
The three best-in-class gold stocks that I identified are DRDGold Ltd. (DRD, Financial), Newmont Corp. (NEM, Financial), and Barrick Gold Corp. (GOLD, Financial). However, before delving into an analysis of each, let's test their diversification benefits.
The correlation matrix below shows the three assets are nearly uncorrelated to the SPDR S&P 500 ETF (SPY, Financial) trust. As such, there is a reasonable basis to conclude that DRDGold, Newmont and Barrick Gold are prudent diversification plays.
Source: Author's work - Data from Portfolio Visualizer
DRDGold: A stronghold in the industry
DRDGold (DRD, Financial) is a South African-based gold mining company. Having previously operated as a deep mine explorer, the company recently transitioned into a surface recovery business with significant profit margins and a stronghold within its industry.
The company has two components, namely ERGO and Far West Gold Recoveries. Although slightly different in project exposure, the two segments amalgamate into a business model that runs tailings facilities. More specifically, they host the Driefontein plat and Ergo and Knights plats, which possess a total milling capacity of 2.5 million tonnes per month.
Source: DRDGold
ON Aug. 23, DRDGold released its earnings results for the year ended June 30, beating estimates as it delivered 5.5 billion rand (approximately $290 million) in revenue.
The company's 7.7% year-over-year growth was primarily driven by solid gold prices and nimble retreatments. And, due to its resilient performance, DRDGold decided to raise its dividend base to provide its American depository receipt investors with a forward dividend yield of roughly 2.10%.
Adding to its compelling dividend is a price-earnings ratio of 13.28, which is lower than the sector average. As such, it is possible to conclude that an overwhelming amount of variables imply the stock is set for further upside.
Newmont: A global powerhouse
As the world's largest gold miner by value, Newmont (NEM, Financial) needs no introduction to most. Even though the company has sustained its bumps and bruises over the years, it remains a global powerhouse with solid total return prospects.
In recent months, Newmont has received clearance from Australia's competition commission to complete its proposed $26.8 billion takeover of Newcrest Mining. Although the acquisition is set to be completed at a 30.4% premium, the deal will likely add to the company's asset base while lowering costs amid access to bulk ores from shallow mines. Moreover, Newcrest is vertically integrated, allowing Newmont to add horizontal market share to its business model, subsequently presenting it with an opportunity to enhance its pricing power.
Source: Newcrest Mining - 2022 full-year results from existing assets
In my view, Newmont provides spectacular shareholder value. For example, the stock's forward dividend yield of 4.08% is accompanied by a price-book ratio of 1.61, which summarizes the stock's total return prospects.
Barrick Gold: A Turnaround opportunity
Barrick Gold (GOLD, Financial), led by renowned mining CEO Mark Bristow, is a close competitor of Newmont. However, Barrick presents a turnaround opportunity instead of a continuous value-additivity opportunity.
The turnaround I am referring to pertains to Barrick's recent capital expenditures cycle, which saw it sequence and do maintenance on many of its mines. Moreover, the company mines in underserved areas such as West Africa and New Guinea, which have recently experienced political turmoil.
Source: Barrick Gold
Although obstacles have occurred in these underserved regions, Barrick Gold's North and South American mines have sustained their performance in recent years. However, I believe the additional turnaround from its underserved areas will be the primary catalyst moving forward.
As illustrated by Barrick's second-quarter results, the company achieved tremendous success from its Tier 1 asset base, which led to a 36% surge in adjusted net earnings.
Strong gold prices were salient to the company's phenomenal second quarter; however, idiosyncratic events stimulated organic growth. For instance, the company's Lumwama asset experienced a year-over-year revenue increase of 40% while reducing its cost of sales by 21%. Further, its Nevada complex resumed progress with strong throughput experienced at the Carlin mine.
Barrick's operating profit margin of 22.86% ranks in the 84th industry percentile, allowing it to award its shareholders lucrative dividends yielding 2.85%. In addition, the price-to-tangible book ratio of 1.5 remains in respectable territory, lending me a baseline argument to conclude that Barrick Gold possesses promising total return prospects.
Conclusion: The value of gold stocks in uncertain times
Gold mining stocks present lucrative diversification benefits, which might be useful in today's uncertain economic environment.
Although there are many high-quality gold mining stocks to choose from, key metrics suggest the likes of DRDGold, Newmont and Barrick Gold are best-in-class assets with robust total return prospects.
