Source: Royal Gold.
But, a rising dollar is doubly bad for emerging market countries that rely on exports and/or rising commodity prices to drive growth. China, for instance, is a very export-driven economy, but it's witnessed its currency, the yuan, shrink to 6.2 to $1 compared to 6.8 to $1 just five years ago. If China, the most important metals importer in the world, sees its growth slow because of weaker exports, it could further dampen gold consumption.
One company clearly at risk from a rising dollar is gold royalty interest stock Royal Gold .
Unlike traditional miners, Royal Gold provides up-front cash to mining companies in exchange for a percentage interest of their mineable gold reserves at a very low fixed cost. Although its fixed cost for gold is extremely low and not in danger of losing money anytime soon, it is easily affected by fluctuations in the underlying price of gold . It also doesn't help that roughly 60% of its revenue in 2014 was derived outside the U.S., meaning it's getting hit by the negative effects of currency translation.
2. Financing risk
The second big risk for gold stocks is simply financing their build-out, especially if a company like Royal Gold isn't there to help.
What's left is a company that's more than 95% off of its all-time high and is lugging around $700 million in net debt for a debt-to-equity of 133%.
Source: Royal Gold.
I personally continue to view this as a bullish turnaround candidate, but there are clear liquidity and financing risks, here. My only consolation is that Thompson Creek isn't the only miner facing financing issues.
3. Political risk
The final concern for gold stocks is the political risk of operating in countries or regions that are highly unstable. A strong dollar might be hurting gold miners in Australia or Canada, but there's veritably no risk of political instability harming mining operations in these countries. However, this isn't the case for gold miners operating in Africa, where political instability is practically a way of life.
Source: AngloGold Ashanti.
In 2012, multinational gold miner AngloGold Ashanti saw all of its operations in South Africa come to a grinding halt as mining laborers across the country went on strike, demanding higher wages. Not only did this represent a potential increase in the underlying expenses to run AngloGold Ashanti's South African mines, but it also cut off a third of the gold production AngloGold was producing as a whole.
AngloGold eventually conceded to wage increases and reopened its mines, but the company has noted as recently as this past week that there can't be open wage discussions each year with laborers without there being any consequences. Additionally, South Africa's power utility Eskom is requesting a whopping 25.3% increase in 2015-2016 electricity tariffs, which includes a previous 12.69% increase in March.
You be the judge
There are obviously some well-defined risks associated with gold miners, but it's not as if opportunity doesn't exist. Miners have done a good job of trimming their costs and raising cash to buffer against any additional downside in gold prices. Some gold stocks relative to their profits or book value certainly appear cheap, but inclusive of the risks mentioned above, that's going to be up to you to decide.
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The article 3 Types of Risk Facing Gold Stocks originally appeared on Fool.com.
Sean Williams owns shares of Thompson Creek Metals, but has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong , and check him out on Twitter, where he goes by the handle @TMFUltraLong .The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
