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Mining companies will have 'cash coming out of their ears' in Q3 - High Tech Strategist

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(Kitco News) - The mining sector continues to be undervalued and under-owned by generalist investors and institutions, but that is expected to change very soon, according to one market analyst who said that the third-quarter earnings season will be too profitable to be ignored.

In a telephone interview with Kitco News, Fred Hickey, creator of the High Tech Strategist newsletter, said that he is expecting to see a perfect environment for gold miners in the third quarter as most companies are back at full production after a weak second quarter. On top of that, because of the higher gold price and lower costs, companies will see historic margins, Hickey added.

"Miners are going to have cash coming out of their ears," he said.

What is exciting about the earnings season is the fact that mining companies are still significantly undervalued compared to the last bull market, which ended in 2011.

Looking at the VanEck Vectors Gold Miners ETF (NYSE: GDX), the mining sector is up nearly 36% since the start of the year; however, the gauge for senior producers is significantly down from the highs seen in 2011.

The HUI Gold BUG Index also shows a similar pattern with strong gains for the year but well off the highs seen in 2011, when gold first pushed past $1,900 an ounce.

"I don't think the stocks have moved far enough yet because investors don't recognize the leverage they represent to the gold price," he said. "The mining sector has just come out of a bear market and all the attention is on tech stocks. But that is going to change when investors see massive earnings gains, massive cashflow and dividend hikes.

Not only is the mining sector expected to see unprecedented value generation with higher margins and growing cash flow, but Hickey also said that they will stand out in an economic environment that continues to struggle to deal with the devastation created by the COVID-19 pandemic. 

"I think the miners are going to start to really stand out amongst the moment I'm investors, as well as others," he added. "We're just starting to see the institutions come in because they're starting to see the value being created."

While the third quarter is expected to be a standout for the mining sector, Hickey said that this is just the start of a bigger trend. He explained that it will take a while for costs in the mining sector to increase, and in the meantime, he expects gold prices will continue to rise.

He added that the gold market and the mining sector are just in the first phases of a bull market, where billionaires and the "smart money" start to move into the market.

"I don't think there is a billionaire out there who doesn't own gold and see its value," he said.

The next phase is when institutional investors, hedge funds, and pension funds get involved. Hickey said that these institutional players are just starting to dip their toes into the precious metals market.

The third phase is when retail investors jump in enmasse.

"And who knows how high prices will be then because who knows how much money printing has been done in the meantime," he said.

Looking at the gold prices, Hickey said that the market can only go up as governments and central banks continue to pump money into financial markets.

"This is the best environment I have seen for precious metals," he said. "If the level of central bank money printing and debasement is unlimited, so is the price of gold. So is there more room for the price of gold? Oh, absolutely."

As to what companies Hickey likes, he said the first factor is to find companies that operate in strong jurisdictions where the rule of law is firmly enshrined. Hickey's top jurisdictions include Australia, Canada, U.S., and Mexico.

He added that while institutional firms will be looking to invest in the biggest most liquid miners, he likes the mid-tier and junior producers as they have the biggest growth potentials.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.