Commodities & Metals

Despite Caution About Gold, Merrill Lynch Has 4 Gold Stocks to Buy Now

Lee Jackson

Published: August 31, 2016 9:50 am

Last Updated: January 13, 2020 4:04 am

It was one of the best trades of 2016, and investors who bought gold miners at the beginning of the year or the end of 2015 saw a stunning 31% rise in the precious metal. With the gold index getting absolutely pounded over the last half of August, some are looking for a correction. The Philadelphia Gold and Silver Index (XAU) was down a stunning 11% alone last week, and that was the biggest decline since last January.

A new report from Merrill Lynch’s very respected precious metals analyst Michael Jalonen and his team reiterates their long-term bullish outlook, but points to short-term technical and fundamental trends that could signal a sizable correction.

They list five top picks that they remain very positive on, and we highlight the four that make sense for investors looking to add to or initiate precious metal trades. All are rated Buy at Merrill Lynch.

Goldcorp

This top company with a solid balance sheet makes sense for investors to consider. Goldcorp Inc. (NYSE: GG) engages in the acquisition, exploration, development and operation of precious metal properties in Canada, the United States, Mexico and Central and South America. It primarily explores for gold, silver, copper, lead and zinc deposits.

Goldcorp’s principal mining properties include the Red Lake, Éléonore, Porcupine and Musselwhite gold mines in Canada; the Peñasquito and Los Filos mines in Mexico; the Marlin property in Guatemala; the Cerro Negro and Alumbrera mines in Argentina; and the Pueblo Viejo mine in the Dominican Republic.

The Merrill Lynch analysts feel that the company deserves a premium valuation to its peers due to its excellent balance sheet, growth profile with lower cost new mines, longer average mine life and a solid dividend yield. Over the past few years, Goldcorp has been altering its mine plans, cutting spending and disposing assets in order to reduce costs and focus on the most profitable production. The analysts see a solid second half and expect higher output and lower costs.

Goldcorp investors are paid a 0.50% dividend. The Merrill Lynch price target for the stock is $26, and the Wall Street consensus target is at $21.45. Shares closed Tuesday at $15.47, down over 5% on the day.

Royal Gold

This another solid company for investors looking for a gold presence. Royal Gold Inc. (NASDAQ: RGLD) is a precious metals royalty and stream company engaged in the acquisition and management of precious metal royalties, streams and similar production-based interests. The company owns interests on 193 properties on six continents, including interests on 38 producing mines and 24 development stage projects.

The company posted solid second-quarter numbers. Merrill Lynch loves the solid asset base of long-life royalties operated by some of the best gold mining companies in the world. The royalty type companies make sense for investors wanting to avoid the actual mining aspect of sector.

Investors are paid a 1.25% dividend. The Merrill Lynch price target is $95 and the consensus target is posted at $91.96. The stock closed Tuesday at $73.62 a share, down over 4%.
Tahoe Resources

The Merrill Lynch analysts remain very positive on this smaller play. Tahoe Resources Inc. (NASDAQ: TAHO) is a U.S.-based gold and silver producer with zinc and lead by-products. Tahoe’s primary assets are its Escobal silver mine in Guatemala, the La Arena and Shahuindo gold mines in Peru, and the Timmins operations in Canada. In 2016, Tahoe expects to produce 370,000 to 430,000 ounces of gold and at the high end of 18 million to 21 million ounces of silver at all-in sustaining costs of $950 to $1,000 an ounce for gold and $8.00 to $9.00 an ounce for silver.

This is the top mid-tier play at Merrill Lynch, and the analysts cite two very solid acquisitions over the past 18 months in which the company should be reaping benefits as the firm updated guidance earlier in August.

Tahoe investors are paid a 1.81% dividend. The Merrill Lynch price objective is posted at $22.50. The consensus target is $20.46, and the shares closed most recently at $13.29, down 4.5% for the day.

Silver Wheaton

This is another top company that many on Wall Street favor. Silver Wheaton Corp. (NYSE: SLW) is the largest pure precious metals streaming company in the world. Based on its current agreements, forecast 2015 estimated annual attributable production is approximately 44.5 million silver equivalent ounces, including 230,000 ounces of gold. By 2019, estimated annual attributable production is anticipated to increase significantly to approximately 55 million silver equivalent ounces, including 325,000 ounces of gold.

This anticipated growth is expected to be driven by the Silver Wheaton’s portfolio of low-cost and long-life assets, including precious metal and gold streams on Vale’s Salobo mine and Hudbay’s Constancia project.

Silver Wheaton has 18 long-term purchase agreements and one early deposit long-term purchase agreement associated with silver and gold relating to 27 various mining assets. It has silver and gold interests primarily in the San Dimas, Zinkgruvan, Yauliyacu, Stratoni, Los Filos, Peñasquito, Keno Hill, Neves-Corvo, Cozamin, Minto, Barrick, Aljustrel, 777, Salobo and Sudbury mines, as well as the Rosemont, Loma de La Plata, Constancia and Toroparu projects.

Again, the company fits nicely into the Merrill Lynch metrics for quality assets and royalty streams, and the kind of balance sheet that has protected the company from the pitfalls of miners with huge capital expenditures.

Silver Wheaton shareholders are paid a 0.78% dividend. The Merrill Lynch price target is $35, and the consensus target is set at $33.55. The stock closed Tuesday at $25.60, down 4.55% as well.

Proper asset allocation should always include a single-digit percentage holding of precious metal like gold and silver. Not only do they hedge over the long term, they can really help if the market does go in to correction or bear market mode, as they tend to trade inverse to markets trading down.