It’s always hard to judge the bottom of a cycle—and it’s certainly hard for gold right now. I suspect that the recent rally in gold to a close of $1320.90 an ounce on February 20 isn’t likely to hold and that we’ll get a retreat back below $1200 before the year is done. But that’s only my best projection and the market is deeply divided right now between analysts calling for gold to move higher from here (and to finish 2014 higher) and those projecting an end of the year price at $1050 an ounce or so.
In this context I can’t say whether this is the time to start buying shares of Yamana Gold. If gold moves lower so will the shares of gold miners. Those shares have by and large outperformed gold itself in 2014.
But I do think that Yamana’s fourth quarter earnings report, announced on February 19, does represent something very like a bottom for the company: big impairment charge, big cuts to capital budget and to the dividend, and what looks like a stabilization of the all-in cost of production at a very low level.
Impairment for the quarter came to a whopping $682 million against operations in Brazil because of a delay in starting operations and against several exploration projects. That took the loss for the quarter to $536 million. Excluding these items the company earned 5 cents a share in the quarter, down from 26 cents a share in the fourth quarter of 2012.
Gold reserves fell by 8%. That is a relatively small reduction in comparison to those being declared by other gold miners recently—Goldcorp (GG), for example, declared a 15% reduction in reserves. Read more
There’s still another week to go before investors have seen the last earnings reports from the global gold majors—Newmont Mining (NEM), one of the biggest gold producers doesn’t report until February 20, for example—but it’s already clear that this quarter’s result will put major distance between miners that are closing in on a bad news bottom and those that look like they’ve got another quarter or two before they face up to the full dimensions of bad news in their sector.
Once the reports are in I’d suggest taking a hard look at portfolios of gold mining stocks with an eye toward adding to names that look like they’ve aggressively reported bad news and subtracting names of companies that still have another shoe or two to drop.
I’ll be doing exactly that kind of pruning and buying in another week or so with the two gold mining stocks, Goldcorp (GG) and Yamana Gold (AUY) that I own in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/
Goldcorp will get a hard look then after the company reported very disappointing fourth quarter results today, February 13.
Goldcorp’s earnings for the period were really ugly. The company reported earnings per share of 9 cents a share, 14 cents a share below the Wall Street consensus, and a huge drop from earnings of 62 cents a share in the fourth quarter of 2012. (And that’s excluding big write-downs on mines and mine projects. Including those items—and a tax charge in Mexico—Goldcorp showed a net loss for the quarter of $1.1 billion or $1.34 a share.) Revenue dropped 16.2% from the fourth quarter of 2012. Gold production did hit a new record of 768,900 ounces, up from 700,400 ounces in the fourth quarter of 2012.
But I expected this kind of earnings and revenue ugliness. And so did the market apparently since the stock climbed 3.61% today.
What was disappointing, however, is the company’s very tentative move to reduce its assumed price of gold and the therefore very limited reductions in proven and probably reserves. Read more
As sure as April showers bring May flowers, January brings reserve updates from gold mining companies that foreshadow the annual earnings reports that these companies will issue in February. Yamana Gold (AUY) and Randgold Resources (GOLD) initiate the February earnings parade from gold mining companies with reports on February 2 and 3, respectively. Kinross Gold (KCG) follows on February 12 with Goldcorp (GG) and Barrick Gold (ABX) reporting on February 13. Newmont Mining (NEM) issues its numbers on February 20.
Gold fell 28% (or more, depending on how you measure it) in 2013 and that damage is certainly reflected in the prices of gold mining stocks. For 2013 shares of Goldcorp were down 39.3%, shares of Barrick Gold were off 48.2%, and shares of Newmont Mining were lower by 47.8%.
But the January updates of reserve levels are still likely to bring more pain as companies write down the level of reserves that they’ve shown on their books for the last year even as the price of gold plunged.
Why more write-downs now? Read more
It looks like another group of gold traders and investors has thrown in the towel today. Yesterday on news that the Federal Reserve would taper its $85 billion in monthly asset purchases to $75 billion gold fell below $1,200 an ounce to a five-month low.
Today gold (February 14 futures on the Comex) has dropped another 3.2% (as of 2:30 p.m. New York time) or $39.20 an ounce to $1195.30.
It sure looks like some traders, who had been holding onto their gold positions in the hope that the price of gold would climb on news either that the Fed had decided not to taper or that the taper would be very modest, are selling today. The logic to being long gold ahead of the Fed’s decision was that the market would see either a no-taper or small-taper decision as likely to produce inflation—which would lead to an advance in gold prices. With the price of gold dropping on what was indeed a very modest taper, this argument for holding gold is done, cooked, out of here.
Selling does look like the best decision in the short term since the downward trend in gold—with futures down 36% from the September 11 record of $1,923.70—is still in place. And it’s not clear where it stops. I’m hearing $1,000 an ounce frequently but I don’t know if that’s based on anything other than $1,000 being a nice round number. Certainly markets have a tendency to defend round numbers—such as $1,000 an ounce—but that doesn’t mean they always successfully defend them.
In the long term, however, the picture looks very different with the supply of gold falling. Read more
Barrick Gold (ABX) freaked out the gold sector on November 1 with news that it would raise at least $3 billion in a new stock offering.
At a minimum of 163.5 million shares, the offering represents 16% dilution for current shareholders. (Earnings would have to be spread over 16% more shares.)
And that has raised fears across the sector as traders and investors try to figure out which company might be next. Of course, as is usual, the initial reaction is to sell first and figure out the danger to any specific company later
Shares of Barrick Gold fell 11.2% on November. Want an example of collateral damage? Shares of Yamana Gold (AUY) dropped 5.6% on the day. (Yamana Gold is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
Here’s the problem at Barrick Gold in a cash flow nutshell. With the drop in the price of gold, Barrick’s revenue has tumbled and that has put a big strain on cash flow. The company finished the September quarter with $2.28 billion in cash and cash flow from operations of $1.23 billion. But because Barrick has such a big investment program that operating cash flow turns into just $26 million in free cash flow. And that’s after cutting dividend payments in the quarter to $50 million from $200 million and reducing capital spending to $1.21 billion from $1.56 billion
Without those reductions Barrick Gold would have been free cash flow negative for the September quarter.
That left CEO Jamie Sokalsky with just a few options.
The company could further cut capital spending by suspending construction at projects such as the Pasua-Lama mine n the Argentina-Chile border. Barrick announced that it would do just that at the same time as it announced its stock offering. Cutting capital spending, however, is a tricky game since it does delay future revenue gains even if it saves money now
Barrick could sell assets—but with the price of gold and copper assets so low, this assures that assures that the company sells on the cheap
Or the company could bite the bullet and sell stock.
Beyond the effects at Barrick, the stock sale raised worries across the sector that 1) Barrick was expecting gold prices to fall even further, and that 2) other gold miners will have to sell stock and dilute current shareholders.
I can’t predict the price of gold from here. With the U.S. and global economies showing signs of weakness I think you can certainly make an argument that gold isn’t a good candidate for a rally from here in the coming months.
I think you can get a handle on the dangers of dilution, however, at any company by taking a long look at cash flow. Read more