With So Much Cash, Do Gold Miners Deserve More Credit?

The VanEck Vectors Gold Miners ETF (GDX), the oldest and largest exchange traded fund dedicated to gold miners equities, is off 9.38% year-to-date.

That may sound ominous, but the case can be made that GDX gold mining equities are getting the Rodney Dangerfield treatment: they just can’t get any respect. The $14 billion GDX, which tracks the NYSE Arca Gold Miners Index, can benefit from gold’s historical reputation as a premier inflation-fighting asset.

However, some fears that the Federal Reserve could accelerate its timeline for interest rate hikes are looming over bullion and miners. If bond yields increase, the case for gold could be dented because physical gold and the related ETFs don’t offer dividends or interest payments.

On that note, GDX yields 1.12%. While that’s not high, even by the standards of today low-yield environment, the fund’s dividend yield is a testament to a recent spate of dividend growth among gold miners, including some marquee GDX components. And that payout growth is a testament to many GDX member firms bolstering their balance sheets in recent years.

The solidification of company balance sheets is always prudent and today, it’s paying off for gold miners. However, if the ETF’s 2021 performance is any indication, market participants may not be giving GDX holdings the respect they deserve for their cash positions.

“The gold mining sector is demonstrating excellent fundamentals, representing a complete disconnect between intrinsic value and market value, said Michael Gentile, strategic investor,” reports Kitco News. “Gentile cited the highest free cash flow the sector has seen in forty years, as well as the highest inflation-adjusted cash flow yield of any equity sector right now as being reasons for the gold stocks’ undervaluation.”

Valuation alone isn’t a reason to embrace an individual stock or ETF. However, when low multiples come with favorable cash positions, things get a little more interesting. In fact, on the basis of free cash flow yield, gold miners probably haven’t ever looked this positive.

“The free cash flow yield of the gold sector, if you look at a 40-year chart from the 1970s to today, there’s never been a time when the free cash flow yield of the gold sector has been higher,” said Gentile in the Kitco News interview.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.