The gold miner space
This year started out on a very good note for gold and gold miners. This follows a multiyear losing streak for gold. Gold equities are essentially a leveraged play on gold prices.
When gold prices fell by 11% in 2015, the VanEck Vectors Gold Miners ETF (GDX) amplified that loss by returning -25%. This year is different only in direction, with GDX amplifying gold’s gains positively this time. The higher the correlation or leverage to gold prices, the higher the impact on stock prices. So during times of high and increasing gold prices, leveraged ETFs and equities usually outperform the underlying commodity.
This works the other way as well. The Direxion Daily Gold Miners Bull 3x ETF (NUGT), for example, has returned a whopping 473% YTD (year-to-date). The Direxion Daily Gold Miners Bear 3X ETF (DUST) has returned -96% in the same period.
How has leverage worked?
With increasing gold prices, these players’ leverages work to the upside, leading to higher-than-industry gains. The largest outperformance in the senior gold miner space has come from the most levered stocks. Kinross Gold (KGC) and Yamana Gold (AUY) are higher cost producers. Higher stock price gains are usually in the early stages of a gold bull market.
While gold prices (GLD) have risen by 25% YTD as of August 19, 2016, the VanEck Vectors Gold Miners ETF (GDX) has risen 113%. The rise in GDX was led by senior gold miners Barrick Gold (ABX), Goldcorp (GG), Kinross Gold (KGC), Newmont Mining (NEM), and Yamana Gold (AUY). They rose 165%, 55%, 163%, 139%, and 176%, respectively.
Yamana and Kinross have outperformed senior gold miners to date. Both of these stocks have historically traded at a discount to their peers. Their higher leverage and the recent focus on cost improvements and operational consistency have also led to the outperformance.
In this series
The 2Q16 earnings season is over, and all major senior gold miners have reported their earnings for the quarter. So now it’s time to find out which miners fared better than others. In this series, we’ll look at various factors that are affecting gold miners such as Barrick Gold, Newmont Mining, Goldcorp, Yamana Gold, and Kinross Gold. Goldcorp forms the largest share of GDX’s holdings at 7.2%.
We’ll discuss factors such as cost profile, cost reduction progression among miners, production growth factors, and debt standing. Finally, we’ll see how these factors have affected stock performances under the current gold price environment. We’ll see which stocks are more levered to gold prices.
Let’s start by looking at gold miners’ geographical exposure in the next part of this series.