Kinross Gold (KGC): An Undervalued Gem Amidst Gold’s Perfect Storm

Forget artificial intelligence and crypto moonshots — let’s talk about a prehistoric asset that's been crushing it. 

Gold — that same shiny rock that has captivated humanity since the dawn of time — has been one of the best-performing assets over the last year and since Trump's election. 

The market is telling us something important here, and it's time to pay attention.

An Undervalued Gem Amidst Gold’s Perfect Storm

A lot has changed in the past year, but one constant has been the steady outperformance of gold. A year ago, gold was trading a little above $2,000. Today, it’s less than $100 away from $3,000. 

To help you understand the greater context, indulge me in a tangent about the Super Bowl. 

I’m a huge Eagles fan. So, yes, Sunday was a big deal. But, there’s also a striking parallel with gold. All season long, the Eagles were battling injuries at key positions — 8 out of their 14 regular season wins were decided by less than one score. It prevented us from seeing what the team would look like at full strength. There were doubts about whether the team was really elite, and specifically about its QB Jalen Hurts, who had suffered a concussion late in the season which led to doubts about whether the team was a real contender.

Still, the team had persevered and finished the season at 14-3. In hindsight, it’s clear that the team’s success despite these headwinds was a strong indicator of its talent and potential. In the Super Bowl, the team was fully rested and the closest it had been to full strength since Week 1. Most importantly, the QB was back to 100% and able to effectively run and pass.

We all saw what happened. Their talent overwhelmed a Chiefs team that was aiming to make history with a three-peat. It was total domination. They made Patrick Mahomes and Andy Reid look confused and helpless. And, the City of Brotherly Love erupted into a joyous and raucous celebration.

Similarly, gold has delivered strong returns in less-than-ideal circumstances. These headwinds include multi-decade highs in interest rates, falling inflation, and a rising US dollar. Typically, gold’s best performance is when rates are falling, inflation is rising, and the US dollar is weakening.

Now, let’s talk about why this relative strength is so meaningful and a harbinger of structural changes that should lead to continued outperformance. Then, I’ll share a Strong Buy-rated gold mining stock with significant upside potential. 

The Macro Shifts

Just as earnings ultimately determine where a stock is going, real interest rates are the biggest driver of gold prices as they represent the opportunity cost of owning gold. 

Real interest rates are what you get when you subtract inflation from short-term, interest rates. For example, in a world where interest rates are 4% and inflation is at 1%, investors can earn a risk-free return of 3% after inflation. So, it makes sense that gold ownership becomes more attractive when this measure declines, and owning it becomes more costly when it rises.

The 20-year chart below shows that periods of falling real interest rates have coincided with rising gold prices. Thus, the last couple of years have been quite anomalous in that gold prices have risen along with real interest rates.

Looking ahead and factoring in the economy and inflation, it seems likely that real interest rates are due to decline. While there is considerable short-term disagreement about inflation, the longer-term trend is clear: Inflation has peaked and will continue to normalize. This means that the Fed is no longer handcuffed and will be free to act aggressively if the labor market deteriorates. 

There are also nascent signs that the jobs market has been weakening under the surface. Cyclical industries like manufacturing, industrials, and homebuilding are starting to roll over. Unemployment claims are rising from very low levels. The number of people quitting their jobs has also collapsed to the lowest level in years. And, surveys are showing that it’s becoming harder to find new jobs. 

So far, this weakness has been masked by strength in areas like government, education, and health care. However, hiring in these parts of the economy is also slowing. Another factor is that an estimated 3-4 million Americans are retiring every year. So, the unemployment rate remains depressed, but the labor market is not exactly dynamic and is vulnerable to any negative shock. 

Overall, it’s clear that real interest rates will plateau and most likely decline, over the next year, fueling further potential upside for gold. 

Undervalued Gold Miners

Another interesting development is that the gold miners have seriously lagged gold prices. This is certainly unusual as gold miners should outperform gold because they have more leverage on the underlying asset.

Assume a gold miner’s all-in cost of production is $1,500 per ounce. When gold is at $2,000 per ounce, it earns $500 per ounce. If the price of gold were to go up by 50%, then the gold miners’ profit would triple.

Historically, bull markets in precious metals end with significant outperformance in mining stocks due to this leverage and multiple expansion as investors and traders become excessively optimistic about future prospects. 

This is far from what we are seeing today. When gold first exceeded $2,000 in 2021, the VanEck Gold Miners ETF (GDX) was at $42. Today with gold flirting with $3,000, GDX is still at $42. Even more astounding is that GDX is 50% below its all-time high in September 2011, when gold was trading at $1,800.

There are some valid reasons for the underperformance of gold miners. For one, the business is risky as operations can easily be disrupted by some sort of operational issues, a lack of liquidity, natural disasters, environmental problems, or government interference. Many smaller or junior miners routinely end up diluting shares, going bankrupt, or being acquired for a pittance when these issues arise. Therefore, it’s important to focus on the best operators and highest-quality companies. 

Additionally, the sector is heavily dominated by retail traders and investors. This also means that the space is rife with hype and fraud. After all, it’s much easier to make some money by selling shares in a company or raising capital based on the prospect of finding gold than it is to actually get the licenses and permits, hire employees, buy machinery, and start mining for gold. Therefore, it’s imperative that investors also consider mining stocks that have reputable management teams and institutional ownership.   

This is where the value of a proven, quantitative ratings system stands out. Zen Ratings evaluates stocks across 115 different factors to give a detailed and holistic perspective. It can help investors avoid pitfalls and ‘bad operators’ which can handicap portfolios. Using this system, I’ve unearthed a stock that checks all the boxes mentioned above:

Kinross Gold Corp. (NYSE: KGC)

Kinross Gold was founded in 1993 and operates in North America, South America, and West Africa, indicating a diversified source of revenue.

Perhaps more interesting, Kinross Gold (KGC) is ranked in the 99th percentile of the thousands of stocks we track, with a Zen Rating of A (Strong Buy) — a class of stocks that have historically produced annual returns of 32.52%. It’s the #1 rated stock we track within the gold mining sector.

It’s also a part of the Zen Investor portfolio, where it is up more than 25% since being added in October of last year. Each stock in the Zen Investor portfolio is hand-picked by 40+ year market veteran Steve Reitmeister, who uses a rigorous 4-step screening process to locate the highest-potential stocks. 

KGC’s last earnings report showed an all-in cost of production of $1,350 per ounce. Over the last year, the company has generated $1.2 billion in free cash flow. This is quite impressive given that its total market cap is $16 billion. Compare this to a stock like Apple (AAPL) which produced $105 billion in free cash flow, over the same time period, with a market cap of $3.5 trillion.

Given this performance, it’s not surprising to see that KGC has several high Component Grades, including above-average B marks for Value, Momentum, Growth, and Financials. However, the standout is an A grade for Sentiment, where KGC ranks in the 95th percentile of all the stocks we track. This Sentiment rating is consistent with the undervaluation of the gold mining sector and is one reason that stocks like KGC have incredible upside if gold prices continue rising. (See all 7 Zen Component Grades here.)

Conclusion

Usually in markets, there are tradeoffs. Assets with strong growth and momentum aren’t great value picks. Conversely, value stocks don’t have the best growth or momentum characteristics.

So, it’s rare to find a stock like KGC that rates well in all 3 of these categories.

(BTW: The Zen Ratings system is invaluable in identifying these types of outlier stocks.)

This is largely because the gold miners are a sector that went from extremely overvalued and frothy in 2011 to undervalued and hated, today. Yet, gold prices are at record highs, while the fundamental picture is only getting more constructive. It also increases confidence that we are still in the early innings of this bull market as previous bull markets ended with sharp outperformance and multiple expansion from gold miners rather than underperformance and multiple-compression.

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