Intermediate Gold Miners with High Leverages to Outperform Peers



Intermediate gold miners

Intermediate gold miners aren’t far behind senior gold miners in terms of mimicking gold price trends. These miners are smaller than senior gold miners in terms of production and market capitalization, but they’re still generally liquid, unlike their junior counterparts (GDXJ).

On the other hand, their geographic diversification is usually limited, making them more prone to risk if there are disturbances in their production areas.

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Strong correlation to gold prices

This group also has a strong correlation to gold prices, though it’s lower than that of senior miners. Agnico Eagle Mines (AEM), Yamana Gold (AUY), Eldorado Gold (EGO), New Gold (NGD), and IAMGOLD (IAG) make up 11% of the VanEck Vectors Gold Miners ETF (GDX). On average, this group has shown a correlation of 0.90 with gold prices since 2013 as of September 21, 2016. The group’s YTD (year-to-date) correlation is stronger still at 0.92.

What’s with IAMGOLD?

Among these intermediate miners, IAMGOLD has outperformed its closest peers, rising 191% as of September 21. IAG has higher costs compared to most of its peers, making it relatively highly leveraged to gold prices. Gold’s price rise since the start of 2016 has helped IAG’s operational leverage to work in its favor. The company mentioned during its call that a $100-per-ounce rise in the price of gold increases its pretax cash flow by ~$80 million.

Yamana has risen 151% YTD. It has high financial leverage—a higher-beta play on gold—and this fact has led to its share price rising more than those of its peers.

Eldorado, on the other hand, has lagged behind its peers by a wide margin YTD, rising only 37%. Permitting issues and geographical concerns have plagued this company’s share price since the start of the year. New Gold (NGD) and Agnico Eagles Mines (AEM) have risen 105% and 108%, respectively.

While IAMGOLD offers the highest leverage to gold prices, it has some pending operational issues that must be resolved before fundamental investors will want in. On the other hand, Agnico is a high-quality name with exposure to safe jurisdictions and strong growth. It also offers reasonable leverage to a gold price increase.

The Direxion Daily Junior Gold Miners Index Bull 3x Shares ETF (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 appetites.

In the next article, we’ll see why royalty and streaming companies are lower beta plays on precious metals prices.


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