What’s Driving the Performance of Intermediate Gold Miners in 2016?



Gold price performance

Gold prices have been quite supportive in 2016 as compared to the precious metal’s performance in the last three years. This support has provided a nice tailwind to gold miners.

Based on their financial and operating leverage, the returns of gold miners have diverged since the beginning of 2016. In this part, we’ll look at the year-to-date (or YTD) returns of these miners, and we’ll explore the reasons for divergence.

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Companies’ return YTD

Iamgold (IAG) has been the outperformer so far in the intermediate gold miner space. Year-to-date, Iamgold’s stock price has risen 291% through September 22, 2016. Even on a relative basis, it has outperformed most of its peers. Eldorado Gold (EGO), New Gold (NGD), and Agnico Eagle Mines (AEM) have risen 37%, 105%, and 108%, respectively.

IAG has higher costs compared to most of its peers, which makes it relatively highly leveraged to gold prices. The rise in gold’s price since the start of 2016 has helped IAG’s operational leverage to work in its favor. The company noted during its 2Q16 call that an increase of $100 per ounce in the price of gold increases its pretax cash flow by ~$80 million.

Agnico Eagle Mines (AEM) has high-quality growth assets in safe mining jurisdictions and good, experienced management. High-quality names are usually left behind in the initial stages of an underlying commodity bull run, which is probably the reason that Agnico hasn’t returned as much as its leveraged peers (RING) (SGDM). The return is still high at 108% YTD.

On the other hand, Eldorado Gold (EGO) 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.

What we’ll cover in this series

In this series, we’ll analyze four notable intermediate gold mining companies. The factors we’ll examine include cost, production, reserves, leverage, financial health, analyst ratings, and valuation multiples. An analysis of these companies should help investors understand which miners could weather the gold price environment in 2016 and beyond.

The major gold exchange-traded funds are the VanEck Vectors Gold Miners Index ETF (GDX) and the SPDR Gold Trust ETF (GLD). Investors can get broad-based exposure to gold by investing in these ETFs.

Continue to the next part of this series for a closer look at the geographical exposure of these miners.


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