The Awful Gold-Mining Stocks Have Awesome Potential
I wrote this just to illustrate the potential of one average gold-mining stock if the gold price rise this year (now through May) is only average for the past 13 years. Be sure to take note of the statement at the end.
4X Gold-Mining Stock Gains?
Only if This Year’s Gold Price Gain Is Average
IAMGOLD Corp (NYSE-IAG), once a hot gold-mining stock, is—let us not be melodramatic—showing no signs of life. At least not in the price of the stock, which has been around $4.00 a share for a year and a half. In the six months before that, it fell from $15.00 a share. Back around June 1, it touched $3.00 a share, but the medium-sized and junior gold stocks have started to twitch lately, perhaps galvanized by hope for the approaching strong season for gold that begins, most years, in late August.
IAG is not unusual. The gold-mining stocks, and silver-mining stocks with them, have suffered what they call in Brooklyn an ‘80 percent stomp,’ and left bleeding in the street. IAG’s flat-lining price is not exceptional. In fact, I choose it an illustration only because I own it (ouch) and it is a well-known, typical, uncomplicated medium-sized gold miner.
Started in 1990, with offices in Toronto, IAG now has six gold mines in Africa, South America, and Canada, all in production, all strong in proven and estimated reserves. It also is a rare miner of niobium--lucrative, but too small to add much to the bottom line. IAG has a market cap of $1.6 billion, debt of about $600 million. Not much else to know.
What hit it? Nothing complicated. In late 2012, the gold price began a
waterfall decline from around $1800 an ounce, hit $1300 an ounce toward the end of 2013, and has stayed there going on a year and a half. The ‘why’ can be made complicated, but what stands out is that the flood of money injected into the economy by the Federal Reserve, so-called ‘quantitative easing,’ actually unprecedented monetary inflation, has levitated the stock market into the one of the longest, least corrected bull markets on record.
The bull market in stocks, and the almost explicit guarantee that the Fed would backstop it, began to suck capital out of many other investments, including GLD, the giant exchanged-trade fund that is one of the largest holders of gold bullion in the world, rivaling leading central banks. When holders of shares of GLD sell stock, management must sell gold bullion that they hold. Sales from GLD were swift and gigantic, dwarfing strong physical buying of gold and every other source of support for the gold price.
As this occurred, gold futures traders began dumping their long gold contracts in unprecedented numbers and buying short contracts in amounts and at a speed never before seen in this market. Obviously, margin call after margin call went out; the price of GLD fell sickeningly; and the gold-mining stocks, leveraged to the price of gold, simply collapsed—losing as much as 70 percent of their value, in many cases. And there we sit.
Except that, although the stock market continues to levitate, this bull is now very senior; signs abound that it may be topping. The Fed has started to shut down its quantitative easing and will supposedly be done by October. The selling of shares in GLD not only has stopped, but this year has stabilized and begun to reverse. The same with futures traders, who are unwinding their gigantic short positions and modestly going long.
And now, we are approaching the traditionally strong months for the gold price, driven by seasonal factors such as jewelry buying in India and China, and later in North America, well known to gold bugs. In fact, since 2001, when the bull market in gold launched, the price of gold, on average, has increased about 15 percent from September to May. Often, it has increased much, much more; the only year it did not increase was 2013. That resulted from the huge headwinds described here, forces that now seems no longer operative.
What about IAG, which we left lying lifeless? During the six months ending June 30, it produced 380,000 ounces of gold, about the same as the year before. Forward guidance is for an increase because a new mine is coming online. It sold those 380,000 ounces for about $1,288 an ounce.
The problem is that its cash cost of producing an ounce of gold was about $880 an ounce. What is called its ‘all-in, sustaining cost’ of producing an ounce was about $1,165 (though it has managed to push that down, this most recent quarter). Still, with all-in costs at $1,165 an ounce and gold sales averaging $1,288 an ounce, IAG managed adjusted net earnings for the six months of only $20.7 million or $0.05 per share.
With the major forces driving down the gold price now in abeyance (2013’s was a once-in-a-century plunge in price), with the price basing for 18 months at $1300, and with the powerful tendency of all markets to revert to the mean, we may at least speculate on what this year’s strong season for gold may bring.
If, as average since 2001, the gold price increases 15 percent, we get an increase of $200 per ounce or a gold price right at $1,500. That would be a perfectly average year, with no allowance for how markets, especially the precious metals, do far more than mean revert. They strongly correct their trend in both directions—usually dramatically over-shooting mere reversion to the mean.
But let us stick with a $1500 gold price, an increase of $200 an ounce in coming months. IAG’s cost of producing an ounce of gold is about $1,165 (but lower in the most recent quarter). It will mine at least 370,000 ounces of gold in the next six months (more like at least 400,000 with its predicted modest increase in production resulting from its new mine).
Those 370,000 ounces at $1300 an ounce would have yielded $480 million. But the same 370,000 ounces at an average gold price of $1500 will yield $555 million—a nice increase of $75 million in revenue.
But the cost per ounce mined will increase not at all. The addition of $75 million a year in revenue entails no additional cost; it results entirely from the increase in the gold price.
The earnings from mining operations in the six months ending June 30 of this year, $97 million, would become $172 million over six months, but with no added costs. Thus, the adjusted net earnings of $20.7 million would become almost $96 million ($20 million plus the $75 million in new profit just from the increase in the gold price). That looks like a 400 percent gain, to me.
But surely that gain in profits would not translate into a jump in IAG’s stock price of 400 percent?
Well, checking a historic chart of IAG’s price, we see that in February, 2011, it was $24 a share. What was the gold price at that time? It had just risen to a high of $1,410 an ounce.
A 4X gain from IAG’s price as of this month, which was $4.0, would give us a share price of $20. A conservative estimate, when you think of it.
*This is a theoretical analysis of possible changes in the gold price and their hypothetical effects on earnings and stock price. It is not a recommendation to make any investment of any kind.
4X Gold-Mining Stock Gains?
Only if This Year’s Gold Price Gain Is Average
IAMGOLD Corp (NYSE-IAG), once a hot gold-mining stock, is—let us not be melodramatic—showing no signs of life. At least not in the price of the stock, which has been around $4.00 a share for a year and a half. In the six months before that, it fell from $15.00 a share. Back around June 1, it touched $3.00 a share, but the medium-sized and junior gold stocks have started to twitch lately, perhaps galvanized by hope for the approaching strong season for gold that begins, most years, in late August.
IAG is not unusual. The gold-mining stocks, and silver-mining stocks with them, have suffered what they call in Brooklyn an ‘80 percent stomp,’ and left bleeding in the street. IAG’s flat-lining price is not exceptional. In fact, I choose it an illustration only because I own it (ouch) and it is a well-known, typical, uncomplicated medium-sized gold miner.
Started in 1990, with offices in Toronto, IAG now has six gold mines in Africa, South America, and Canada, all in production, all strong in proven and estimated reserves. It also is a rare miner of niobium--lucrative, but too small to add much to the bottom line. IAG has a market cap of $1.6 billion, debt of about $600 million. Not much else to know.
What hit it? Nothing complicated. In late 2012, the gold price began a
waterfall decline from around $1800 an ounce, hit $1300 an ounce toward the end of 2013, and has stayed there going on a year and a half. The ‘why’ can be made complicated, but what stands out is that the flood of money injected into the economy by the Federal Reserve, so-called ‘quantitative easing,’ actually unprecedented monetary inflation, has levitated the stock market into the one of the longest, least corrected bull markets on record.
The bull market in stocks, and the almost explicit guarantee that the Fed would backstop it, began to suck capital out of many other investments, including GLD, the giant exchanged-trade fund that is one of the largest holders of gold bullion in the world, rivaling leading central banks. When holders of shares of GLD sell stock, management must sell gold bullion that they hold. Sales from GLD were swift and gigantic, dwarfing strong physical buying of gold and every other source of support for the gold price.
As this occurred, gold futures traders began dumping their long gold contracts in unprecedented numbers and buying short contracts in amounts and at a speed never before seen in this market. Obviously, margin call after margin call went out; the price of GLD fell sickeningly; and the gold-mining stocks, leveraged to the price of gold, simply collapsed—losing as much as 70 percent of their value, in many cases. And there we sit.
Except that, although the stock market continues to levitate, this bull is now very senior; signs abound that it may be topping. The Fed has started to shut down its quantitative easing and will supposedly be done by October. The selling of shares in GLD not only has stopped, but this year has stabilized and begun to reverse. The same with futures traders, who are unwinding their gigantic short positions and modestly going long.
And now, we are approaching the traditionally strong months for the gold price, driven by seasonal factors such as jewelry buying in India and China, and later in North America, well known to gold bugs. In fact, since 2001, when the bull market in gold launched, the price of gold, on average, has increased about 15 percent from September to May. Often, it has increased much, much more; the only year it did not increase was 2013. That resulted from the huge headwinds described here, forces that now seems no longer operative.
What about IAG, which we left lying lifeless? During the six months ending June 30, it produced 380,000 ounces of gold, about the same as the year before. Forward guidance is for an increase because a new mine is coming online. It sold those 380,000 ounces for about $1,288 an ounce.
The problem is that its cash cost of producing an ounce of gold was about $880 an ounce. What is called its ‘all-in, sustaining cost’ of producing an ounce was about $1,165 (though it has managed to push that down, this most recent quarter). Still, with all-in costs at $1,165 an ounce and gold sales averaging $1,288 an ounce, IAG managed adjusted net earnings for the six months of only $20.7 million or $0.05 per share.
With the major forces driving down the gold price now in abeyance (2013’s was a once-in-a-century plunge in price), with the price basing for 18 months at $1300, and with the powerful tendency of all markets to revert to the mean, we may at least speculate on what this year’s strong season for gold may bring.
If, as average since 2001, the gold price increases 15 percent, we get an increase of $200 per ounce or a gold price right at $1,500. That would be a perfectly average year, with no allowance for how markets, especially the precious metals, do far more than mean revert. They strongly correct their trend in both directions—usually dramatically over-shooting mere reversion to the mean.
But let us stick with a $1500 gold price, an increase of $200 an ounce in coming months. IAG’s cost of producing an ounce of gold is about $1,165 (but lower in the most recent quarter). It will mine at least 370,000 ounces of gold in the next six months (more like at least 400,000 with its predicted modest increase in production resulting from its new mine).
Those 370,000 ounces at $1300 an ounce would have yielded $480 million. But the same 370,000 ounces at an average gold price of $1500 will yield $555 million—a nice increase of $75 million in revenue.
But the cost per ounce mined will increase not at all. The addition of $75 million a year in revenue entails no additional cost; it results entirely from the increase in the gold price.
The earnings from mining operations in the six months ending June 30 of this year, $97 million, would become $172 million over six months, but with no added costs. Thus, the adjusted net earnings of $20.7 million would become almost $96 million ($20 million plus the $75 million in new profit just from the increase in the gold price). That looks like a 400 percent gain, to me.
But surely that gain in profits would not translate into a jump in IAG’s stock price of 400 percent?
Well, checking a historic chart of IAG’s price, we see that in February, 2011, it was $24 a share. What was the gold price at that time? It had just risen to a high of $1,410 an ounce.
A 4X gain from IAG’s price as of this month, which was $4.0, would give us a share price of $20. A conservative estimate, when you think of it.
*This is a theoretical analysis of possible changes in the gold price and their hypothetical effects on earnings and stock price. It is not a recommendation to make any investment of any kind.
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- 1Posted by $ number6 10 years, 2 months agoThe ETFs GDX and GDXJ represent the Gold Miners index and Junior Gold Miners indices respectively. (There are also double and triple miner ETFs for the derivative fans)| Mark as read | Best of... | Permalink
