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Frank Holmes: revenue, cash flow to boost gold-mining stocks

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(Kitco News) - Shares of gold-mining companies have fallen with the broader stock market lately, but producers are likely to become more attractive over the next couple of months as investors take note of the revenue and free cash flow they are generating, said Frank Holmes, chief executive and investment officer with U.S. Global Investors.

“You’re going to see these gold stocks all of a sudden looking extremely attractive coming into April and May [based on] their numbers,” Holmes told Kitco News in an interview.

Meanwhile, he said, as stocks of base-metals companies get beat down on worries about less use of  commodities due to slowing industrial demand, these could end up being bargains for those with a longer-term time horizon.

U.S. Global Investors’ mutual funds include those for precious metals, natural resources and emerging markets. The company also oversees a gold exchange-traded fund.

Holmes pointed out that there are two pillars upon which gold-mining stocks normally stand. They correlate with both the trend in the commodity price, as well as the broader stock market. So when the major stock indices took a beating lately on COVID-19 worries, with investors looking to preserve capital and raise cash, gold-mining stocks fell too.

“In short periods of time, they correlate very highly with the S&P 500,” Holmes said.

Nevertheless, gold stocks do have factors working in their favor that will eventually kick in, the CEO continued.

“You’re going to expect this quarter that the year-over-year growth in revenue, growth in cash flow and returns on investor capital [for gold companies] are going to be much higher than in copper mines and base-metal mines…,” Holmes said.

Likewise, he later pointed out, certain retailers – such as Walgreens – might also fare well due to anticipated revenue growth as customers stockpile goods amid the COVID-19 virus outbreak.

“You’re seeing this rotation in the general market with people looking for revenue-per-share growth,” Holmes said. “Even with the market meltdown, Walgreens [shares] are up because people know they’re going to have great revenue this quarter.

“And gold stocks are going to show, in this quarter, great revenue per share. Of the 100 gold producers we follow, they’ll be showing very attractive returns.”

Revenue hinges not only on the amount of production but gold prices. The yellow metal has pulled back sharply from the seven-year highs hit earlier in March. Still, Holmes pointed out, prices are well above where they were a year ago, meaning favorable year-on-year comparisons when investors look at producers’ potential revenue and earnings. The price of spot metal was $1,473 an ounce as of 12:17 p.m. EDT on Thursday, well above $1,292 at the end of the first quarter of 2019.

“Newmont has a free-cash-flow yield of about 4%,” Holmes said. He later added, “It’s going have bigger revenue-per-share growth this quarter … at probably greater than the S&P average stock. So you’ll see money flowing into those names.”

Holmes pointed out that U.S. Global Investors’ gold-mining exchange-traded fund, the Go Gold and Precious Metal Miners ETF (GOAU), includes 28 companies considered to be “showing revenue growth, cash-flow growth, free cash flow, and a high return on investor capital in every quarter.”

Besides producers such as Newmont, Holmes commented that streaming and royalty companies such as Franco-Nevada and Wheaton Precious Metals have been outperformers due to their strong cash flow. For instance, Wheaton’s earnings report last week showed $502 million in operating cash flow during 2019.

Meanwhile, prices of base metals have been hit hard with other so-called risk assets, with market participants factoring in expectations for weaker industrial demand as the coronavirus slows the global economy. For instance, Holmes pointed out that BMW is curtailing production of autos, which will be a hit to demand for copper, used in electrical wiring.

“But as you go through the next wave [of selling in shares of these companies], you’re going to get some great buys,” Holmes said.

Furthermore, new forms of demand may start to materialize, he continued.

“Metals like copper are going to become much more significant in health care,” Holmes said. “The Israelis are coming out with ionized copper to spray on your clothes. You’re going to get more countertops made [with copper] because viruses can’t attach themselves….I think you’ll get a sea change after this paranoia ends.”

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