Gold stocks remain a Buy as market underprices long-term bullion

Despite a banner year for bullion, with gold soaring roughly 26% year-to-date to around $3,310 an ounce, shares of gold mining companies have failed to keep pace.

While the VanEck Gold Miners ETF (GDX) has climbed 43%, analysts at Jefferies argue this understates how undervalued the sector remains—especially intermediate producers.

Jefferies’ models suggest the average gold miner is pricing in a long-term gold price of just $2,557 per ounce—nearly 23% below current spot levels.

That gap implies a significant disconnect between the price of gold and the valuation of those who produce it. The average price-to-net-asset-value (P/NAV) multiple for the firms under Jefferies’ coverage stands at 0.6x, which the analysts point out is “40% below historical averages.” In short: “We still see an attractive entry point for gold equities.”

Among their top picks are Barrick Gold Corp. (TSX:ABX, NYSE:GOLD), Endeavour Mining PLC (LSE:EDV, TSX:EDV, OTCQX:EDVMF), and Dundee Precious Metals Inc (TSX:DPM).

What's holding back the miners?

If gold is hitting record highs, why haven’t miners seen the same enthusiasm? Jefferies lays out three explanations investors may be clinging to—and refutes each in turn.

First, there's the notion that gold prices will fall. While Jefferies acknowledges that gold prices could eventually moderate, their long-term forecast of $2,500 per ounce still supports higher valuations for miners. “Miners still screen inexpensive relative to their historical consensus forward earnings and cash flow multiple ranges,” the note reads.

Second, some investors may expect a medium-term drop in gold prices. But that’s not what Jefferies is hearing. “We don't think this is a common view and in fact, we are hearing more about upside risk than downside risk,” analysts wrote.

The third and most enduring concern: that gold companies have historically failed to capitalize on higher gold prices. “There have been production misses, cost inflation, poorly thought out M&A, and so on,” analysts wrote.

“In other words, a view that there's always something ‘broken’ in the gold sector.”

But, they argue, this cycle is fundamentally different.

‘This time really looks different’

According to Jefferies, the stars are finally aligning for the gold mining sector. “Gold companies finally find themselves in a situation where the gold price is significantly higher and cost inflation is reasonable,” they said, estimating inflation at under 5% year-over-year in 2025—potentially even lower with easing energy prices.

That has translated into rising free cash flow (FCF), a trend already visible in first-quarter results of Newmont Corporation (NYSE:NEM, TSX:NGT, ASX:NEM, ETR:NMM) and Agnico Eagle Mines Ltd (TSX:AEM).

Investors, they argue, are beginning to see the fruits of discipline from management teams that are now focused on capital returns rather than growth for growth’s sake. “We think over the past few years, shareholders have sent a clear message to management teams to prioritize capital return, and we're seeing that now with higher dividends and buybacks,” analysts noted.

“Overall, fundamentals for the sector have never looked better—strong balance sheets, record FCF, and increased capital return,” the team concluded. “We expect gold equity valuations to re-rate higher and return toward their historical trading ranges as FCF generation and capital returns are demonstrated over the NTM.”

In other words: investors may want to look again at a sector long dismissed as perennially “broken.” Jefferies thinks it’s finally fixed.