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Eldorado Gold vs. Yamana Gold: Which Mining Stocks is a Better Buy?

Gold mining stocks were particularly strong from March to July due to the Fed’s dovishness and weak economy. Eldorado Gold (EGO) and Yamana Gold (AUY) are two major players in the gold mining space that generated hefty returns for investors and are poised to gain further if the gold rally continues. However, let’s find out which of these stocks is a better buy now.

Precious metals have always been perceived as a safe-haven asset, with its nominal price rising over time. Despite a major correction after the positive coronavirus vaccine news last month, it could be an opportunity to buy gold if the Fed implements another round of easing and the economy remains weak. 

Eldorado Gold Corporation (EGO) and Yamana Gold Inc. (AUY), two of the prominent players in the precious metals mining industry, have been thriving amid the pandemic as investors turned to precious metals in protecting their investments and hedging against inflation and economic uncertainty.

Both the stocks generated decent returns over the past three years. While EGO returned 108.9% over this period, AUY gained 105.5%. In terms of year-to-date performance as well, EGO is a clear winner with 47% returns versus AUY’s 32.2%. But which of these stocks is a better pick now? 

Let's find out.

Business Structure and Latest Movements  

EGO engages in the exploration, discovery, acquisition, financing, development, production, sale, and reclamation of mineral products, primarily in Turkey, Canada, Greece, Brazil, and Romania. The company primarily produces gold, as well as silver, lead, zinc, and iron ore. It operates five mines: Kisladag and Efemcukuru located in western Turkey, Lamaque in Canada, and Olympias and Stratoni located in northern Greece.

The Greek Ministry of Environment granted EGO permits to conduct surface exploration drilling in the Stratoni area in the last quarter. The company commenced an expansion project in Greece and renewed its operating permit for Olympias that allows for an annual production limit of 470,000 tons per year.

AUY is a Canadian precious metals producer which explores for and produces gold and silver ores. AUY plans to continue to build on its operations through expansion and optimization initiatives at existing operating mines, development of new mines, the advancement of its exploration properties.

AUY expanded its footprint in the Abitibi Region last month with a friendly acquisition of Monarch Gold Corporation. As part of the deal, AUY will acquire Monarch’s Wasamac property and the Camflo property. Moreover, the company is efficiently continuing the Agua Rica feasibility study advancement and integration agreement it entered last year. The management expects the integration to complete in the current quarter.

Recent Financial Results

EGO had an excellent third quarter. The company reported a top-line of $287.6 million, growing 67% year-over-year, with gold contributing nearly 92% to the total revenue. Gold production of 136,922 ounces increased 35% from last year’s comparable quarter. EGO reported adjusted net earnings of $0.33 per share, compared to the year-ago value of $0.05 per share.

The strong momentum in gold prices was reflected in AUY’s third-quarter report as revenues grew 22.8% year-over-year to $439.4 million. The company produced 0.2 million ounces and 3.04 million ounces of gold and silver, respectively, both exceeding management’s expectations. However, EPS significantly declined to $0.06 from the year-ago value of $0.21, primarily due to high exploration and evaluation expenses.

Here EGO is in an advantageous position.

Past and Expected Financial Performance

EGO’s revenue grew at a CAGR of 32.4% over the past 3 years. However, the company’s free cash flow has declined at a CAGR of 16.2% in the same period.

The market expects the company’s revenue to increase by 25% next quarter and 40.3% next year. EGO’s EPS is expected to decline by 57.1% in the current year but rise 66.7% next year.

On the other hand, AUY’s revenue has declined at a CAGR of 46% over the past 3 years. But the company’s free cash flow grew at a CAGR of 24.9% in the same period.

The market expects AUY’s revenue to increase by 12.3% in the next quarter and 6.7% next year. The company’s EPS is expected to grow 50% in the current year and 58.3% next year.

AUY has an edge over EGO here.

Profitability      

AUY’s trailing-12-month revenue is more than 1.5 times of what EGO generates. But EGO is more profitable with a net income margin of 18.4% versus AUY’s 7.8%.

Moreover, EGO’s ROE and ROA of 4.7% and 3% compare favorably with AUY’s 2.7% and 2.9%, respectively.

Valuation

In terms of forward P/E, AUY is currently trading at 21.90x, 73.5% more expensive than EGO which is currently trading at 12.62x. Moreover, EGO is less expensive in terms of trailing-12-month P/S (2.14x versus 3.29x).

In terms of trailing-12-month price/cash flow as well, AUY’s 7.62x is 39.6% higher than EGO’s 5.46x.

AUY looks much more expensive compared to EGO.

POWR Ratings

Both EGO and AUY are rated “Neutral” in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for EGO and AUY:

EGO has an “A” for Peer Grade, a “C” for Trade Grade and Buy & Hold Grade and a “D” Industry Rank. In the 30-stock Miners – Gold industry, it is ranked #10.

AUY has a “C” for Buy & Hold Grade and Peer Grade and a “D” for Trade Grade and Industry Rank. It is ranked #6 in the same industry.

The Winner

While both EGO and AUY are good long-term investments considering the global demand for the yellow metal and their continued expansions, EGO appears to be a better choice based on the factors discussed here.

The Fed is unlikely to change its accommodative stance in the near to medium term as it will take time for an effective vaccine deployment and a pick-up in economic growth. Hence, EGO is a relatively cheaper option to capitalize on the pandemic tailwind as gold continues to rally.

Want More Great Investing Ideas?

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AUY shares were trading at $5.42 per share on Tuesday afternoon, up $0.20 (+3.83%). Year-to-date, AUY has gained 38.68%, versus a 15.50% rise in the benchmark S&P 500 index during the same period.



About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.

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