Intermediate gold miners
Intermediate gold miners are smaller than senior gold miners in terms of production and market capitalization, but they are still generally liquid, unlike their junior counterparts. On the other hand, their geographic diversification is usually limited, making them more prone to risk if there are disturbances in their producing areas. Even these miners have had a strong run in 2016, similar to their senior counterparts.
Correlation to gold prices
Intermediate gold miners also have strong correlations with gold prices, though the correlations are lower than those of senior miners. Agnico Eagle Mines (AEM), Yamana Gold (AUY), Eldorado Gold (EGO), New Gold (NGD), and IAMGOLD (IAG) make up 13.6% of the VanEck Vectors Gold Miners ETF (GDX). On average, this group has shown a correlation of 0.92 with gold prices since 2013 as of July 25, 2016. Their YTD (year-to-date) 2016 correlation has been somewhat weaker but still significant at 0.88.
Among these intermediate miners, IAMGOLD (IAG) and Yamana have outperformed their closest peers. They have gained 185% and 172%, respectively, YTD. Historically, these stocks have lagged behind their peers due to their high financial leverage and operating leverage. The same higher beta is leading their share prices to rise more than peers’ betas. To understand more about IAG’s outperformance and earnings expectations, please read Can IAMGOLD Continue to Outperform in 2Q16?
Eldorado, on the other hand, has lagged behind peers by a wide margin YTD, rising by only 40%. Permitting issues and geographical concerns have plagued this company’s share price since the start of the year. Agnico Eagles Mines and New Gold have risen 90% and 80%, respectively. Agnico is a quality miner with low costs, a strong balance sheet, and very good assets. This is the reason it has risen less as compared to its peers. Lower beta and high quality are the reasons that only Agnico’s stock price gained in 2015 while all its peers saw negative returns.
The Direxion Daily Junior Gold Miners Index Bull 3x Shares (JNUG) is another way of gaining exposure to increasing gold prices. JNUG comes with significant risk factors, however, so investors should invest according to their risk appetite.
In the next part, we’ll see why royalty and streaming companies are a lower beta play on precious metal prices.