As the market melts, gold is glittering and returning gold miners some of their lost luster.
After a five-year, 56% slide, the S&P/TSX Global Mining Index has begun to form a second leg of a v-shape, rising 16.6% year to date. The SPDR Gold Trust ETF (GLD, Financial) traveled in almost lock step, up 17.7% year to date, defying the market’s 0.54% retreat.
The World Gold Council expected 2016 to look quite different than 2015 for gold. In January, it listed three primary reasons for a better outlook: The effect of higher interest rates driving a stronger dollar on gold is “overdone,” demand for gold is rising in emerging economies and stock valuations and global market risks make it an attractive portfolio diversifier.
The turn of events has proven a boon to gold mining companies’ stocks, such as the largest, Goldcorp Inc. (GG, Financial), which also mines for silver, copper and other geological products. The company’s shares rose roughly 42% year to date, but it has downplayed the sudden spike’s effect on its business, saying in its fourth-quarter results that it had to engage in widespread cost reductions over the year.
“While we are encouraged by the recent upturn in gold prices, the impairments taken reflect the valuation of our assets at conservative assumed lower metals prices over a longer time horizon,” the company’s president and CEO Chuck Jeannes said.
Many investment gurus seemed to affirm Goldcorp’s conservative, long-term approach, making it the fourth most-purchased mining stock of the fourth quarter and the second most-held in all portfolios.
Agnico Eagle (AEM, Financial), the most-held gold mining company of the group as a 6.1% portion of collective portfolios, saw its shares climb 33% year to date. The company has yet to update its 2016 guidance for gold price per ounce but has previously also used modest estimates to value its reserves. While the Securities and Exchange Commission requires companies to use prices that reflect current economic conditions, Agnico Eagle went further in 2015. Management used a gold price of $1,100 per ounce, well below the $1,279 three-year average for an ounce.
For the fourth quarter, low gold prices and nearly doubled exploration expenses negatively impacted the company, but it still managed to turn a profit in the fourth quarter. Agnico Eagle recorded net income of $24.6 million, or $0.11 per share, compared to $83.0 million, or $0.43 per share. Management was able to combat financial pressures by increasing production and benefitting from favorable foreign exchange rates.
Gold’s rise has also begun reverberating through some investors’ portfolios who bought gold mining stocks at their most dire prices. A highly price-conscious investor, Century Management’s Arnold Van Den Berg (Trades, Portfolio)’s portfolio weighting of basic materials stocks leapt from 12.8% to 20.2% from third to fourth quarter 2013 when the price had fallen but still had farther to go. He has since cut it back to 12.6%.
Concerns about rampant public debt and inevitable reversal of quantitative easing dominated Van Den Berg’s gold thesis in addition to what he saw as steep discounts.
“While physical gold is not in our buy zone, many gold mining companies are selling as if the price of gold is currently $800 to $900 per ounce, which is 28% to 36% lower than gold's closing price on January 31, 2014, and well within our buy zone,” he said in February 2014’s Inflation, Gold, and Gold Mining Companies.
Gold’s bounce has helped swing Van Den Berg’s top holdings – Seabridge Gold (SA, Financial), Agnico Eagle and Randgold Resources (GOLD, Financial) – to estimated gains between 12-31% above his average purchase price, while some of his holdings remain depressed.
Manager of hedge fund Appaloosa Management David Tepper (Trades, Portfolio) bought the most shares of a mining company in the fourth quarter ahead of the turnaround, with a 3,557,460-share stake in Freeport McMoRAn Inc. (FCX, Financial) valued at $24 million. He previously sold out of the company in the first quarter 2014 at an average price of $33 per share but got back in around $9 per share. It is his only gold mining holding, and it has a portfolio of oil, natural gas and other resources.
In total, the group were net sellers of metals and mining companies in the fourth quarter, with 45 buyers and 57 starting new positions.
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