Why Gold Stocks Hit the Smelter on Tuesday

GFI Chart
GFI Chart

You'll note the two exceptions above - Eldorado and Primero Mining. Eldorado Gold hasn't participated much in the gold price rally due to an announced write down of $1.2 billion to $1.6 billion on the value of its Skouries mine in Greece. The company also lowered its 2016 production guidance to a range of 565,000 - 630,000 ounces from the 723,500 ounces produced in 2015.

As for Primero Mining, its valuation has been hammered in 2016 following word that Mexican tax authorities want to nullify the Advanced Pricing Agreement issued in 2012 to the company's Mexican subsidiary that governs how much the company should pay in taxes. Primero, for its part, believes the request is without merit, but the 33% year-to-date drop in Primero's stock suggests otherwise.

Catalysts on the horizon

However, Gold Fields, IAMGOLD, AngloGold Ashanti, and Sibanye have other catalysts on the horizon which could excite longer-term investors looking for growth.

Perhaps the biggest source of excitement has been the rise of the U.S. dollar over the past two years. All four of the aforementioned miners operate in Africa, with three of the four (IAMGOLD being the exception) operating mines in South Africa. The South African rand, in particular, has depreciated substantially over that timeframe as the dollar has risen, and it's helped expand margins and profits for miners operating in South Africa.

Talk of negative interest rate policies for developed countries may prove to be another catalyst for gold miners. The enemy of gold stocks is usually certainty and high yields (since physical gold doesn't pay a dividend). If central banks around the globe begin adopting negative lending rates, it may encourage investment in gold as it would imply global uncertainty (thus the aforementioned flight to safety), and investors would have few avenues left to obtain a solid investment yield.

Image source: AngloGold Ashanti.

But, most importantly, we're seeing fundamental progress almost across the board for African miners.

  • In November, Gold Fields' Q3 report showed all-in sustaining costs, or AISC, had fallen to $948/oz., and the company was able to further reduce its net debt balance by $50 million to $1.43 billion.
  • IAMGOLD's Q3 results in early November showed AISC had dropped to $1,027/oz., $88 per ounce lower than in the prior-year quarter. IAMGOLD also maintained its production guidance of 780,000 to 815,000 ounces when it reported its results.
  • AngloGold Ashanti's Q3 report featured production of 974,000 ounces, which was nicely above its prior forecast of 900,000 to 950,000 ounces, and AISC of just $937/oz., a year-over-year decline equaling 9%.
  • Finally, Sibanye, which reported its quarterly results earlier this month, noted that AISC dropped 5% on a quarter-over-quarter basis in constant currency, but 14% when taking into account the depreciation of the rand. Based on its year-end results, Sibanye delivered an AISC margin of 11%.

Long story short, we have production growth, falling AISC, which in many cases is well below the current spot price per ounce for gold, and currencies are cooperating in favor of African miners. These miners will still need these factors to continue to play out in their favor, but it's quite possible that the run in gold stocks may just be getting started.

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The article Why Gold Stocks Hit the Smelter on Tuesday originally appeared on

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, 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 servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy .

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