Gold prices jumped July 17 after a missile shot down a
Malaysian passenger jet over Ukraine. Gold gained additional
support later that day, as Israel launched a ground offensive in
A batch of gold mining stocks also blipped higher.Goldcorp (
) rose nearly 3%.Agnico Eagle Mines (
) andSibanye Gold (
) jumped 4%.Barrick Gold (
) gained 1.5%.
Gold was acting as a safe-haven investment again. Or was
The two geopolitical events occurred on a Thursday. On Friday,
gold retreated past $1,310 an ounce. By the end of the following
week, it had slipped to near $1,303.
can be a soothsayer's game, partially because the yellow metal
wears many hats. In addition to its role as a shelter for
investors' cash in edgy times, it can serve as a hedge against
inflation, which has been rising modestly lately.
Because central banks hold, buy and sell large quantities,
gold is also subject to currency and interest-rate swings,
national debt woes and even a large sell order, which reportedly
drove down the price on July 14.
"Our view is that gold is a sort of alternative investment, a
currency of last resort," said Adam Graf, an analyst with Cowen
Gold prices peaked above $1,895 in September 2011, following a
two-year advance. They pulled back, then rose to a lower peak a
year later. On Friday, prices were up 8% from a December low, but
still 46% below their 2011 peak.
As is their habit, gold and silver miners have tracked those
prices in a volatile echo. As a group, the stocks are up 39% this
year, and almost the same distance -- 46% -- below their 2011
Gold rallied from December to March, until the U.S. and
European Union imposed sanctions on Russia for its role in the
Ukrainian conflict. It tumbled, then started recovering in
Some miners who had succumbed to the longer-term gold bust had
themselves to blame for overextending themselves when gold prices
were high. A notable example: big-gold company Barrick Gold, the
world's largest gold miner by production and revenue.
Miners On The Mend
Gold miners, and the more volatile silver miners that
generally follow in their footsteps, have generally seen their
fundamentals and stock prices improve this year, especially since
As a group, the stocks outperformed all but seven of the 197
industry groups tracked by IBD over the past six months. That
performance, compared with the price of gold, was an anomaly.
"Gold equities for the first time in a couple of years have
actually outperformed the gold price," said Graf.
The companies are cutting costs to adjust to lower gold
prices, he said, noting that most of the cuts are to capital
spending, rather than operations. As a group, miners break even
in terms of cash flow, he says, when gold is between $1,000 and
$1,200 an ounce.
"And now with the gold price moving up and most companies
still focused on lowering their costs, the market is regaining
confidence (in mining companies)," Graf said.
Some standouts in the group in terms of their stock price and
earnings strength include Toronto-based Agnico Eagle Mines, West
Africa'sRandgold Resources (
) and smaller South African miner, Sibanye Gold.
Some analysts view Sibanye as a speculative play. Its two
mines were spun off from the big South African gold minerGold
Fields (GFI) into a separate company last year following violent
Randgold holds an "overweight" rating from Barclays. A recent
report cites "rising production driven by higher grades (of
ore)," as well as declining capital expenditures, rising net cash
and strong upside potential for its dividend.
Several analysts tout Vancouver-based Goldcorp, the largest
gold miner by market capitalization. High-quality assets, mines
in low-risk areas and its relatively low-cost operations all work
in its favor.
Agnico Eagle holds the industry group's highest overall
Composite Rating from IBD, a 95 out of a possible 99. Randgold
and Sibanye Gold also rank highly, in the low 90s.
In mid-June Agnico Eagle acquired a 50% interest in Osisko
Mining, and with it Canada's largest gold mine.Yamana Gold (AUY)
bought the other 50%.
The two will jointly operate Osisko's Malartic mine in Quebec.
They also plan to explore and potentially develop other assets
that came with the $3.4 billion deal, said to be the industry's
largest since 2010.
"It's been a very big year for acquisitions," said Steve
Parsons, an analyst with National Bank Financial in Canada. "The
pace has picked up a lot."
Megamerger Wasn't To Be
Vancouver-basedB2Gold (BTG) recently said it would buy
Australia-based Papillon Resources for $570 million. That gives
it access to a gold mine in Mali.
The sector's biggest merger of the year never happened. It
fell apart in April when mining giants Barrick Gold andNewmont
Mining (NEM) couldn't iron out various details.
Under a tentative agreement forged earlier, Toronto-based
Barrick said it would acquire Denver-based Newmont for around $13
billion. The two expected to realize $1 billion a year in savings
by combining their neighboring Nevada mining operations.
That kind of consolidation, aiming to join two underperforming
mining companies, seems "the most obvious way to lower costs in a
cash-strapped industry," wrote Deutsche Bank analysts in a report
in early July.
But not all analysts view M&As favorably.
"In general, mining M&A doesn't unlock a lot of synergies.
Most costs are at the operations," said analyst Peter Ward of
Jefferies & Co. in an email.
Randgold is one miner that won't likely be "tempted into
M&A," wrote Barclays' analysts. They said management would
rather return cash to shareholders and create value from
Big is not always better. Barrick and Newmont are saddled with
high debt levels relative to most of their peers. But they
generate only modest production growth and own a number of
non-core, high-cost mines, analysts say.
"Big companies have big projects," said Parsons. "Typically in
this industry the big projects tend to be remote. Remote projects
tend to be disproportionately exposed to capital cost pressures
and execution risks."
To reduce risks in a wobbly gold-price climate, some companies
have shelved some of their large, remote projects until prices
move higher, Parsons says. Others have sold off assets to raise
"Barrick has sold what they call non-core assets to raise
capital and repair the balance sheet. But their debt to capital
ratio is 40%, which we see as too high," Graf said.
Barrick's earnings are expected to fall 69% this year, which
would make a third year of double-digit declines.
Newmont is expected to post its fourth straight double-digit
drop in per-share earnings, though next year's is seen
Barrick is still going through a management shake-up begun
earlier this year when former Goldman Sachs president John
Thornton replaced long-time chairman Peter Munk, the company's
Last week Barrick announced CEO Jamie Sokalsky would step down
in September and not be replaced, effectively putting Thornton in
charge. Two co-presidents were named to help run Barrick after
"Before his appointment, Thornton had no experience in the
mining sector," Graf said. "One could say that could be a
Some companies that don't actually run mines are viewed
favorably for that very reason. They're royalty companies, such
asFranco Nevada (FNV) andRoyal Gold (RGLD). They invest in miners
in exchange for a stake in the output.
They don't have to cope with cost inflation and prickly
operational issues such as building infrastructure, securing
permits and dealing with local opposition or strikes.
Local resistance has delayed Newmont's efforts to move ahead
on a large project in Peru. Graf views the setback as a "lucky"
one for Newmont because the project would have put the company in
"difficult financial straits."
"(Newmont) has not overextended itself the way Barrick has, in
part due to luck," Graf said.
Royal Gold is one of Graf's favorite stocks in the gold
sector. "It's low risk because they are not an operator," he
Royal Gold, he says, gets royalties on diversified assets in
safe jurisdictions, including a gold mine in British Columbia
that has been ramping up nicely over the last 12 months.
With gold at current prices, gold mining companies will
continue to "lean out their operations and reduce costs" to
maintain or expand margins, Graf says.
"And they will be more selective on the projects they pursue
and spawn," he said. Companies that have run up their debt, "like
Barrick, will continue to deleverage."
Many large, risky projects are on the sidelines "waiting for
prices to go higher," Parsons said.
But if gold prices rise to a point where too many projects get
off the ground at the same time, he warns that "industry
congestion" will cause capital costs to rise as miners vie for
the same vendors.
"Industry congestion is the root of all evil for mining
companies," he said.
Parsons expects a few more years of modest production growth
before the industry faces such an evil and production falls off
"the cliff." He figures it could happen in 2018 or 2019.
Analysts generally don't expect a big rally in gold prices
until the labor market tightens enough to drive wages up and send
inflation a lot higher.
"Inflation is starting to pick up and that's starting to
provide support for the gold price," Parsons said.
Meanwhile, uncertain geopolitical events in Ukraine and the
Middle East will likely support gold at least at current levels
for the time being, gold watchers say.