Rosenberg Research: Gold miners are one of the most underappreciated investment opportunities in the equity market

The outlook for gold miners continues to shine bright, boosted by a surging commodity price that has no signs of slowing.

This group, as represented by the NYSE Arca Gold Miners Index, has jumped 35 per cent since we started recommending the sector in early 2024. And the best part is that the road ahead remains convincing with a very alluring risk-reward profile.

The continued run-up in underlying gold bullion prices is set to boost the profits outlook. Indeed, earnings per share expectations for 2025 and 2026 for the miners have gone up by 60 per cent and 80 per cent, respectively, since April of 2024.

Stock prices, however, have gone up by just 25 per cent, matching the pace of gains in gold itself over the same period. With a forward price-to-earnings ratio of 12 times earnings and annualized earnings growth for the next three years forecast at 38 per cent, the PEG ratio (forward P/E to earnings growth) works out to be just 0.3 times. For reference, a PEG ratio of less than 1 is considered cheap, between 1 and 2 is considered reasonable, and more than 2 is regarded as expensive. This all implies that precious metals miners are available at bargain basement prices.

Compare this to the MSCI USA Index, which has a PEG ratio of 1.9 times, the MSCI Canada Index at 2.2 or the MSCI World Index at 2.5. This makes gold miners one of the most underappreciated opportunities for equity investors.

To little fanfare, these stocks rank in the top five of all subindustries in the S&P 500 Index and the S&P/TSX Composite when it comes to expected earnings growth. Moreover, it’s not just one stock driving the market, but broad-based strength among all producers. The vast majority (85 per cent) of the stocks in the NYSE Arca Gold Miners Index offer a risk-reward profile better than the MSCI World benchmark.

Compare and contrast this to the concentrated equity landscape right now and this makes the outlook for gold miners more durable. It is also encouraging to see one of the prior main drivers of underperformance reversing: profit margins. Profitability is improving as gold prices scale new all-time highs. The net profit margin of the miners stood at 11.8 per cent in 2023. This is expected to expand to 17.8 per cent at the end of the current reporting period and to 24 per cent by 2026. The highest margin we have seen in the past 20 years is 28 per cent, implying forecasts are well within reason.

What if gold prices fall sharply?

While we are squarely in the camp that gold prices stand to benefit from increased uncertainty – trade wars and fiscal policy. We see a firm floor for the underlying metal price. All-in sustaining costs for gold producers have been rising steadily, and if the bullion price were to fall to US$2,000 per ounce, it would take around 15 per cent of the current gold supply off the market, keeping a floor underneath prices.

However, there are concerns that investors in individual stocks may run into. One of them is the country of operation and resulting challenges pertaining to the regulatory and political backdrop. Some of the biggest gold miners based in North America operate mines in Africa, and these challenges should be considered.

Miners with operations in Canada offer safer profiles and good value. Risks can also be mitigated by exposure through exchange-traded funds such as the VanEck Gold Miners ETF in the United States and the iShares S&P/TSX Global Gold Index ETF in Canada.

Bhawana Chhabra, CFA, is senior market strategist at Rosenberg Research.