How to invest in gold miners who are undervalued

For the businesses that mine gold and other precious metals, the boom has changed their financial situation

Investors ought to profit, according to Kaylie Pferten.

This year, the price of gold has increased by over 60% to over £4,300 an ounce. After years beset by post-pandemic supply chain hiccups, a labor shortage, and the 2022 energy crisis, it has done so, changing the outlook for the gold mining sector.

Gold producers produced about half as much free cash flow last quarter as was predicted by the consensus, according to Jim Luke, who manages Schroders ISF Global Gold and other funds. Crucially for investors, the majority of businesses are not in a rush to spend this windfall.

Miners continue to operate their companies with "conservative gold price assumptions" of between £2,500 and £2,800 per ounce, allowing cash to accumulate on their balance sheets. For the first time in over two decades, the sector transitioned from a net debt to a net cash position in the first quarter of 2025.

The value of gold miners is extremely low.

Consequently, gold miners now appear to be severely undervalued. According to Keith Watson and Robert Crayfourd, managers of the Golden Prospect Precious Metals (LSE: GPM) and CQS Natural Resources Growth and Income (LSE: CYN) investment trusts, the price/earnings (p/e) ratio has halved in the mining industry over the last ten years, while the price of gold has more than doubled. Despite some recent performance, it does not accurately represent the current spot price, which is what gives rise to the opportunity.

Analysts are finding it difficult to keep up with the big miners, who have now turned into cash cows. For the second time in as many weeks, Canaccord Genuity released a note on London-listed Fresnillo (LSE: FRES) last week, raising its 2026 earnings targets by more than 70%.

With regard to Fresnillo, they claim that "our profitability profile has moved faster than at any other time under our coverage." The company's capital expenditure obligations were using up all of its operating cash flow two years ago. Today, cash flow is three times greater than spending.

In the upcoming months and years, a surge in mergers and acquisitions (MandA) is probably going to result from the cash infusion. Watson and Crayfourd state that "it is still less expensive to purchase assets than to construct them, and purchasing eliminates the execution risk involved in development." Larger businesses are anticipated to start concentrating on expansion, which will raise the price at which developers and smaller producers can be purchased.

How to make investments in gold miners.

To profit from the industry, funds that own a variety of bigger miners, smaller producers, and explorers may be the best option. With about 85% invested in gold stocks, Golden Prospect is a pure play on precious metals. Around half of CQS Natural Resources is invested in miners of precious metals because Watson and Crayfourd believe that this is the area of the commodity market with the most potential.

The BlackRock Thematics and Sectors team, led by mining industry veteran Evy Hambro, has ample resources and is responsible for managing the open-ended BlackRock Gold and General Fund and the BlackRock World Mining Trust (LSE: BRWM). Winterflood's investment trust team believes that these are some of the best ways to increase exposure to the sector, which serves as a "one-stop shop" for investors seeking exposure to commodities. While World Mining has 36% gold, Gold and General is a pure play, with nearly 90% gold and the majority of the balance in silver.

In addition, there are a number of other active funds that make investments in gold and precious metals, and an increasing number of passive exchange-traded funds (ETFs) that follow different benchmarks related to gold mining. These latter include L&G Gold Mining (LSE: AUCP) and Van Eck Gold Miners (LSE: GDGB). Both of these have performed admirably over the last 12 months, but as the 83 percent versus 103 percent return difference demonstrates, different funds and indices can produce quite different results.