Mining stocks have missed out on the long-term bull market in the yellow metal. A long-overdue upswing may now be starting, says Dominic Frisby. Here are his top picks in the sector
Gold, as I’m sure you’ve heard, has broken out to new highs. There are two things that excite me about this move. Firstly it came despite outflows from exchange-traded funds (ETFs). Gold ETF holdings have declined by about 25% over the last 18 months – that is a big number – and those outflows have accelerated in recent months as investors have been selling gold ETFs to buy the bitcoin ones. Secondly, there has hardly been any fanfare. It has been a so-called “stealth breakout”, the best kind.
Could this mean the time has finally come for gold miners? They are supposed to give you leverage to the metal: gold goes up 20%, miners double. Except that has not been the case for 20 years. Many other ways to own gold or get exposure to the gold price, beyond buying bullion, have been invented over the last two decades.
They range from the ETFs, options and spread-bets to the gold credit card Glint and digital gold-payments system Tally. As a result, gold miners have lost their monopoly on playing gold with leverage. Why take on the individual risk of a mining company, when they have been so likely to mess up?
Even with gold rising, miners’ profits might not rise nearly as much as one might hope, because the costs of mining – energy, equipment, personnel, meeting regulatory requirements, delays receiving permits – have all increased by more than gold has.
There is also the ongoing problem of incompetent operators and excessive dilution of shareholders, which has turned the sector into a perennial underachiever. The line on a chart of gold relative to the HUI, the index of unhedged gold miners, has been falling – reflecting miners underperforming spot gold – since 2004. We might have found the bottom, though.
Turning a corner?
The world’s largest gold mining company, Newmont, and the only one big enough to be in America’s blue-chip S&P 500 index, last week exceeded analysts’ earnings forecasts by more than 50%.
Agnico Eagle Mines, the world’s second-largest miner by market value (although the third-largest producer) then reported record free cash flow, record operating margins and earnings per share of $0.76, compared with forecasts of $0.60. The large caps c
