Can gold mining stocks continue to be strong? UBS is optimistic about investment opportunities in 2025.

yalties)Franco-Nevada Corporation(FNV.US)Overall, UBS Group AG As the price of gold has reached new highs in recent times, UBS Group AG released a research report on March 31, mentioning the similarly impressive performance of gold mining stocks. UBS Group AG pointed out that gold mining stocks performed better in 2025, with the total return in US dollars being about 20% higher than that of gold for VanEck Gold Mining ETF (GDX). But the question remains, will this trend continue? UBS Group AG pointed out that gold mining companies have provided operating leverage for price increases and potential performance improvements in dividend yields, so theoretically, their performance should be better than that of gold during uptrends. However, at the same time, gold mining companies also face resistance from cost/capital expenditure inflation and continuous pressure to deplete resources/increase production. Additionally, the gold industry has performed poorly in creating value through growth/mergers and acquisitions in the past decade, and inflation has often offset gold price increases, leading to continued poor performance of GDX relative to gold, especially after a major pandemic (i.e. around the past 5 years). Gold mining companies need to rebuild trust but the risk-return ratio remains attractive. Due to years of failing to meet performance guidance targets, it is difficult to believe that the gold industry will achieve its established goals and restore investor confidence. Although some companies will inevitably fail to meet production expectations, after years of disappointment, should market expectations be more realistic? The likelihood of a decrease in overall unit costs in the gold industry by 2025/26 is not high. However, at least the cost guidance for 2025 may be more realistic, as some major mining companies (such as Newmont Mining, Barrick Gold Corporation) no longer predict a decrease in unit costs for the next 2-3 years. With gold prices exceeding $3,000 per ounce, in the coming weeks, market consensus will definitely be raised due to the increase in gold prices, which should bring positive momentum to the overall market profit forecasts, and currently the consensus valuation of gold mining companies is significantly below historical levels. From the release of annual reports to the second/third quarter earnings reports, it is usually a better opportunity to hold gold stocks, as rising gold prices usually push profit estimates higher, while downward adjustments in annual guidance often begin to show in the third quarter earnings reports. Although the performance of GDX has been better than gold in the past 12 months, it has consistently performed poorly over the past 10 years. UBS Group AG remains skeptical about whether gold mining companies can outperform gold and mining project royalty companies in the long term. In the short term, gold mining companies have strong momentum (with the GDX relative strength index at around 70), but considering the positive momentum in profit expectations that the market generally expects to be maintained, the industry's overall guidance is more realistic, and valuations are approaching cyclical lows. The bank believes that gold mining companies still offer an attractive risk-return ratio. Undervaluation of gold mining stocks UBS Group AG analyzed the overall Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), net income trends, and valuation multiples of GDX to determine whether the poor performance of gold mining stocks is due to fundamental factors such as production cuts and cost inflation or a decrease in valuation multiples. UBS Group AG pointed out that in the past 4-5 years (compared to the average level in 2019), the performance of GDX has lagged behind the price of gold by about 40%. Although there is ongoing inflation and poor operational performance, the compression of valuation multiples remains the main reason for the poor performance of gold mining stocks - the 12-month forward price-to-earnings ratio has decreased from 21 times to 15 times, a discount of about 30%; the enterprise value multiple (EV/EBITDA) has decreased from 8.4 times to 7.4 times, a discount of about 10%. Since 2025, the recovery of gold mining stocks has led to a rebound in market expectations for valuation multiples, but with potential profit increases in the coming weeks and valuations still below historical levels, UBS Group AG believes that overall, the valuation of gold mining stocks is still not high. Divergent performances of gold mining companies create investment opportunities In addition to the rise in the price of gold over the past 12 months, another significant feature is the divergent performance of gold mining stocks. Logically, high-cost/high financial leverage miners should perform better; but due to unstable operational performance and increased investor aversion to risks in remote markets (West Africa/Central Africa), stable operating miners in safe jurisdiction areas have performed better (Agnico Eagle Mines Limited, Kinross Gold Corporation, Evolution Mining), while poorly performing miners have been penalized (Newmont Mining, Barrick Gold Corporation, Endeavour Mining). Preferred global major gold miners As expected by the market consensus, UBS Group AG holds a constructive view on the prospects for gold. In their view, the diversification role of gold and gold stocks in portfolios remains attractive, and gold stocks are expected to outperform the market in the next 3-6 months. Due to the significant divergence in industry performance, the valuation gap of gold mining companies is large, which UBS Group AG sees as an opportunity, and they tend to choose some "cheaper recovery stories". Recently, the bank has downgraded ratings for Agnico Eagle Mines Limited (AEM.US) and Gold Fields Limited Sponsored ADR (GFI.US) to "neutral". Among the global major miners, the bank prefers Barrick Gold Corporation (GOLD.US), Northern Star, and believes that after a difficult 2024 year, Endeavour will see good performance in 2025. Additionally, the bank continues to favor mining royalty companies with short-term diversification characteristics, such as Franco-Nevada Corporation (FNV.US). Overall, UBS Group AG believes that the challenges that gold mining companies may face in the coming months will not affect their long-term investment attractiveness, and they believe that the gold industry still has investment potential. royalties)/mineral streaming rights (Streams) model, and prefer Franco-Nevada (FNV.US).Barrick Gold Corporation: UBS Group AG believes that the valuation of Barrick Gold Corporation is very attractive, with short-term operational challenges reflected in conservative forecasts and lower enterprise valuation multiples for 2025 and the next three years. The company has a higher mid-term growth risk, but its 2025 free cash flow yield is comparable to Agnico Eagle Mines Limited and Newmont Mining, with a 30% mid-term growth potential. UBS believes that the market's valuation of its growth potential is still too low. The restart of the Mali project should be a positive catalyst for the stock price, with national/operational risks already fully reflected in the stock price. Northern Star Resources: UBS Group AG points out that the acquisition offer for De Grey Mining has created market uncertainty, leading to weaker performance since 2025 compared to GDX. The bank expects the transaction to be completed in May and believes that the combination of the two companies forms a strong asset portfolio. With the KCGM project expected to reach annual production of 900,000 ounces in the 2029 fiscal year and the potential launch of the Hemi project around the same time, Northern Star Resources' project reserves are attractive, and its management team has good execution capabilities to successfully advance its growth plans. Endeavour Mining: UBS Group AG indicates that Endeavour Mining had a poor performance in 2024 but is at a turning point in free cash flow. With increasing production, decreasing capital expenditure, and strong gold prices, the company is expected to rapidly reduce debt and provide cash returns in 2025/26. Additionally, the company has mid-term growth potential, with the Assafou project in Cote d'Ivoire being worth keeping an eye on. Franco-Nevada: UBS Group AG states that for investors looking to reduce risk and diversify their gold investments, the Royalties/Streams model of mineral rights use fees is still favorable. The bank points out that Franco-Nevada has profit leverage from increasing gold prices, and the commonly expected profit upgrades in the market are also favorable for them. Additionally, the restart of the Cobre Panama mine is expected to bring about a 30% short-term production growth with zero capital expenditure, and news about the project's restart is expected to be a positive catalyst in the next 3-6 months.