Did Gold Price Weakness Hurt Gold Stocks in 3Q16?


Dec. 28 2016, Published 3:28 p.m. ET

Gold price performance

While gold prices were quite supportive in the first half of 2016, they started losing steam in the second half. While analysts predicted that Donald Trump’s win would make gold and miners soar, it actually did exactly the opposite. After Trump’s acceptance speech, things started changing fast. The markets started seeing him as good for US economic growth. The Dow Jones and the S&P 500 have reached new heights while the appeal of safe-haven assets has taken a severe hit.

November was the worst month for gold prices since June 2013. In just one month, gold prices fell 8%. Gold miners have also been negatively affected by the gold price slump.

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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 118% through December 23, 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 -1%, 35%, and 44%, respectively.

IAG has higher costs compared to most of its peers, which makes it relatively highly leveraged to gold prices. The rise in gold prices since the start of 2016 has helped IAG’s operational leverage work in its favor. However, in a weaker gold price environment on the back of higher interest rates, this leverage could be a problem.

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 was probably the reason Agnico didn’t return as much as its leveraged peers (RING) (SGDM) in the first half.

Eldorado Gold, on the other hand, has lagged behind its peers by a wide margin YTD, falling 1.0%. Permitting issues and geographical concerns have plagued this company’s share price since the start of the year.

Series overview

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 4Q16 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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