Why gold miners are lagging(Kitco News) - Share prices of gold-mining companies have lagged gold itself during the metal’s recent run to record highs.
Analysts and fund managers attribute the stocks’ collectiveunderperformance to a simple preference among many investors to holdthe metal itself at the moment, as well as rising operating costs formining companies that limits profits even when they are also fetchinghigh prices for the gold they sell.
Gold has surged in 2011 due to inflation worries, civil unrestin the Middle East and North Africa, sovereign-debt issues in Europeand the U.S., plus a weak U.S. dollar. June gold hit amost-active-contract record of $1,509.60 an ounce Thursday on the Comexdivision of the New York Mercantile Exchange. This represented a 5.9%gain for the year.
However, the Philadelphia Gold/Silver Index (XAU) of miningstocks was nearly flat for the year to date. The Gold Bugs Index (HUI)of unhedged gold stocks was up 4%.
There also has been an underperformance by silver stocks assilver rocketed to 31-year highs, said Daniel Brebner, head of metalsresearch at Deutsche Bank.
Shares of gold producers have outperformed gold itself for muchof the bull run that began around a decade ago, said Jeff Clark,precious-metals analyst with Casey Research. Up through 2007, thisoften occurred at a rate of three or four to one, he said.
Depending on the index, gold stocks outperformed gold byroughly four percentage points last year, Clark said. “And now year todate, they are not outperforming gold as a group.”
Some analysts cited a desire among many investors in thecurrent environment to hold the metal itself as a hedge againstgeopolitical and economic concerns. This especially the case due to the“immediacy” of owning gold via investments such as coins orexchange-traded funds, Brebner said.
“When you buy an equity, you’re buying future gold—futureproduction or ounces,” Brebner said. “When you buy gold through an ETFor direct, it’s not future. It’s now. A lot of investors are looking atrisks much more immediate than five or 10 years away.”
Rising Mining Costs Cited As Factor Limiting Advances For Gold Stocks
As commodity prices soar, so do the expenses for mining companies. Labor costs are also increasing in many nations.
“The exposure that you get to the gold price is diluted throughthe equities because they are seeing that kind of cost inflation,”Brebner said. “The earnings performance of many of the seniorgold-mining companies, or the earnings growth, is lower than what you’regetting from the performance of the gold price.”
Energy is one of the most significant costs for miningcompanies, said Mark Johnson, portfolio co-manager for the USAAPrecious Metals and Minerals Fund. June crude oil on the New YorkMercantile Exchange earlier this month hit $114 a barrel for the firsttime since August 2008. The market has been factoring in an expectationthat the impact of various rising costs will be reflected infirst-quarter earnings reports from producers, Johnson said.
These costs are also occurring in other types of mining, suchas copper and coal, said Kimberly DuBord, director of research forBriefing Research. “It’s not just gold miners,” she said. Coal priceshave been supported by tight market, with U.S. coal being exported.Yet, she continued, share prices of some coal producers took a “hugehit” in the last month.
Strong currencies in key mining nations such as Australia andCanada also cut some into the profitability of mining companies,Johnson explained. Companies receive payment in U.S. dollars, which ishow gold is priced on the global market. But when a currency such asCanada’s strengthens, the company’s expenses rise when translated intoU.S. dollar terms, even if those costs held steady in terms of theCanadian dollar.
Brebner also said it is becoming increasingly challenging for many companies to keep boosting mining output.
Meanwhile, mining companies face political risk in certain partsof the world, analysts said. There are worries about some nationsbasically taking away a majority stake in mines after companies spenthuge sums of money developing them. Further, there have been attemptsby governments to hike taxes or royalties on mines, even in some nationsnormally perceived to have a low political risk for miners.
Analyst: Mining Stock Underperformance Suggests No ‘Mania’ Forming Yet
Clark sees the underperformance of mining equities versus gold as asign that a “mania” some fear has not occurred yet. This would be acondition in which so many investors suddenly pile into a market that abubble forms, such as the Nasdaq and real-estate market crashes sincethe turn of the century.
“That is probably the most important point that can be made,”Clark said. “If the mania was really here—and one might think that isthe case the way gold and especially silver are running to theupside--you would think gold stocks would not only be outperforming themetals but demonstrating three to four times the leverage that theyhave in the past. And they’re certainly not doing that. So that’s aclue we’re not there yet.”
Nevertheless, he said, the current situation could portend sometype of consolidation or correction. This likely will “wash out” somenewcomers to the market. “And of course, that will be the best time tobuy,” Clark said.
Analysts offered mixed views on whether mining stocks will continue to underperform the metal itself.
“I don’t see any convincing reason at this stage why that trendwill reverse,” Brebner said. “I think it’s likely to continue over thenext couple of years and actually it may worsen, if there is a growingdesire for investors to get their hands on metal. That may exacerbatethe underperformance of mining companies versus the commodity.”
However, DuBord looks for the mining shares to close any gapwith the metal. “I think they will catch up over time,” she said,suggesting there might be a move toward diversified miners who producemore than one metal.
Clark looks for gold stocks to eventually regain the upperhand, particularly when “non-gold types” enter the market on a largerscale. These new investors tend to turn to the metal first, heexplained.
“People outside of our industry are starting to look at goldand silver,” Clark said. “That’s the first place they’re going to go.They haven’t gone to the stocks yet. And once they do, that is going tobe the catalyst, I think, that will push gold and silver stocks upmuch higher.