KalNorth Gold Mines Limited (ASX:KGM), a AUDA$8.94M small-cap, operates in the basic materials industry which is sensitive to changes in the business cycle, as it supplies materials for construction activities. Basic material analysts are forecasting for the entire industry, a highly optimistic growth of 32.94% in the upcoming year , and a whopping growth of 39.25% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. Below, I will examine the sector growth prospects, and also determine whether KalNorth Gold Mines is a laggard or leader relative to its basic materials sector peers. View our latest analysis for KalNorth Gold Mines
What’s the catalyst for KalNorth Gold Mines’s sector growth?
Overall, the basic materials sector seems to be predominantly mature in terms of its industry life cycle. Companies appear to be vastly competitive and consolidation seems to be a inevitable. There are plenty of emerging trends to deal with across the board including the reduction of waste, raw material inflation, and innovation in global supply chain management. In the previous year, the industry saw growth of 7.36%, beating the Australian market growth of 6.88%. KalNorth Gold Mines lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means KalNorth Gold Mines may be trading cheaper than its peers.
Is KalNorth Gold Mines and the sector relatively cheap?
Metals and mining companies are typically trading at a PE of 15x, relatively similar to the rest of the Australian stock market PE of 18x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. Furthermore, the industry returned a similar 10.35% on equities compared to the market’s 11.91%. Since KalNorth Gold Mines’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge KalNorth Gold Mines’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? KalNorth Gold Mines recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto KalNorth Gold Mines as part of your portfolio. However, if you’re relatively concentrated in metals and mining, you may want to value KalNorth Gold Mines based on its cash flows to determine if it is overpriced based on its current growth outlook.