Yamana Gold gets hit on earning miss–but provides benchmark for gold mining stocks

Yamana Gold (AUY) has been hit hard today after the company announced first quarter earnings of 16 cents a share—3 cents a share below the Wall Street consensus—and revenue of $535 million—4.4% drop year over year and short of the $559 million consensus. Worst, though, is a huge increase in cash costs of 31% year-to-year, due in good part to falling prices for the copper that Yamana produces as a “byproduct” of its gold mining activity.

Shares are down 5.2% today on the news as of 2:30 New York time. (Yamana Gold is member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/)

I’m not suggesting that you rush out to buy Yamana today. It remains hard to call the trend in gold prices and I doubt that we’ve seen a bottom. And it’s even more difficult to pick a bottom for the shares of gold mining companies. These stocks are caught in a vise of lower gold and copper prices and rising production costs. I think today’s price of $11.39 on Yamana Gold is a reasonable price for adding to positions, but I certainly would leave myself some room in any portfolio allocation to Yamana in case gold goes lower. Adding pluses and minus, I guess that makes me neutral on buying the stock here. One thing I’d like to see is the near-term results of Yamana’s efforts to cut production costs by $100 an ounce by mid-2013 and $150 an ounce by the end of the year. If I saw signs of success in that endeavor, I’d go from neutral to buy.

But of equal—and perhaps greater—importance than buy/sell/hold on Yamana as an individual stock is the way that Yamana’s current results set a benchmark for judging the gold mining sector.

In this tough environment for gold mining companies, I’d like any stock that I owned in the sector to meet what I’d call the Yamana benchmarks.

What are those? Read more

Some gold miners facing a funding gap

More bad news for gold mining companies yesterday. Although not for all gold miners.

Newmont Mining (NEM) just cut its dividend by 17.6%.

Now a dividend cut of any sort is extremely unusual. Boards of directors consider carefully before instituting a dividend because they know that investors take a dividend increase or decrease as an important sign from inside the company about the company’s long-term prospects.

A 17.6% dividend cut, then, is a big deal both because companies go out of their way to avoid sending out such a negative signal and because 17.6% is a BIG cut.

What’s going on here?

It’s called a funding gap. With the price of gold plunging from $1778 an ounce back in October to the neighborhood of $1400 an ounce last week, some gold mining companies are facing a cash crunch. These companies set their capital spending plans to explore and develop new sources of gold, and to expand existing mines based on selling their current production at $1600 or $1700 an ounce. Now that gold is so much lower, the companies face a series of unpalatable alternatives: They can cancel or postpone current spending (and take a beating in the stock market as analysts cut their estimates for future production); or they can raise money in the capital markets and so either add debt or dilute current shareholders by selling stock; or they can cut dividends and take cash that would have gone to shareholders and use it to fund capital spending.

That looks like what Newmont has decided. Read more

Trying to pick a bottom in gold

Any attempt to make sense of what’s happening in the gold market needs to start by splitting that market into pieces.

There are four different kinds of gold markets right now and they each have different dynamics.

First, start with the gold momentum traders since I think this is the biggest group, is getting most of the press attention, and in the short run exerts the biggest influence on gold prices. Gold’s upward momentum peaked sometime in the fall of 2011 when the yellow metal hit its record all time nominal (that is without taking inflation into account) price at $1,920 an ounce. A high percentage of momentum traders kept their gold positions in the hope that upward momentum would return. But in the last quarter of 2012 and the first quarter of 2013 momentum investors began to move out of their gold positions. $9.2 billion flowed out of gold ETFs (exchange traded funds) in the first quarter of 2013. Gold is now in an official bear market—down 27% through the close on April 15—and I don’t think momentum players are headed back into this market any time soon—at least until they see the technical indicators for gold change.

Second, there are the gold as hedge buyers. Read more

Retracement,correction or panicky plunge: Initial thoughts on today’s falling markets

As if April 15 wasn’t already painful enough…

Today we’ve got either a standard retracement of the April rally, a sell off in growth-related stocks on a disappointing report on first quarter GDP out of China, or a panicky plunge in oil, industrial materials, silver and gold.

It’s certainly a down market today but the nature of the “down-ness” depends on how your portfolio is positioned.

It’s hard to judge a downturn while it’s in progress—either for severity or duration—but here’s how I understand what we’re seeing today.

Doubts about growth prospects have been rising for months as analysts cut their earnings forecasts for U.S. stocks even as stock priced rose. Last week, earnings reports from Alcoa (AA), Wells Fargo (WFC), and JPMorgan Chase (JPM) that showed year over year declines in revenue. That added to a general sense of worry over economic growth resulting from projections for lower growth in the EuroZone and disappointing retails sales growth in the United States. The clincher for investors worried about growth came overnight when China announced first quarter GDP growth of “just” 7.7%. That was below economist projections of 8% and below the 7.9% growth posted in the fourth quarter of 2012.

If global growth is going to be lower than expected, you’d expect commodity prices to fall. That decline today, however, has been amplified by a previous retreat in commodity prices. So commodities aren’t just retreating today—they’re reacting to today’s move lower as if it is a continuation of a longer bearish pattern. Today benchmark Brent crude is down 2.2% and London Metal Exchange 3-month contracts on copper are down 2.7%.

The biggest damage, though, comes in gold and silver where today has just accelerated a move that turned from correction to plunge last week when Goldman Sachs recommended going short gold. Read more

Why markets aren’t worried about inflation even as central banks flood the world with cash

It puzzles a lot of you I know from your emails and your posts on my sites. Frankly, it puzzles me. And I’d say that anyone who says this doesn’t puzzle them has more ego than sense.

The world’s central banks have flooded the global financial markets with cash—and they’re still hooking up more and bigger hoses. The Bank of Japan alone now promises to add $80 billion to the global money supply each month.

And yet there’s no inflation. There’s no sign of inflation. Investors aren’t afraid of inflation. And inflation hedges such as gold are sinking like a stone.

Does this make any sense?

Maybe.

You can find a potential key to unlocking this puzzle in The Vapors 1980 hit “I’m turning Japanese I really think so.”

Let’s start by trying to understand the logic of the Japanese market at the moment. Read more