Time To Consider Gold Mining ETFs?

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August 7, 2015 4:38pm NASDAQ:PSAU NYSE:GDX

gold miner pickMany investors are very bearish on the gold mining space right now thanks to the looming Fed tightening, strength in the greenback, uncertain demand from the key consuming nations like China (as its economy is reeling under pressure), as well as investors’

inclination toward cyclical sectors of the equity markets given reasonable improvement in the U.S. economy.

In fact, the space appears to mirror the crush caused by the taper tantrum in 2013. Market Vectors Gold Miners ETF (NYSEARCA:GDX) is off 27% this year while gold bullion ETF GLD has lost over 8%. Mining stocks are always more vulnerable as these are often considered leveraged plays of the underlying metal.

In such a scenario, investors’ eyes must be glued to the Q2 earnings releases of the gold mining companies to understand a roadmap for the second half of the year. Investors should note that three gold mining companies Barrick Gold Corporation (NYSE:ABX), Newmont Mining Corporation (NYSE:NEM) and Gold Corp. (NYSE:GG) came up with mixed results this season. NEM reported on July 22 followed by GG on July 30 and ABX on August 5.

Investors must be surprised to know that ABX spread optimism around the space, pushing GDX up by 2.14%. GG also caused a stir in the market for good while NEM is striving hard but yet to reap returns. This suggests that gold mining stocks are no doubt suffering but might turn around by the end of this year.

Barrick Gold’s Q2 Earnings in Focus

Barrick Gold’s adjusted earnings plunged over 64% to 5 cents per share but were in line with the Consensus Estimate. Lower pricing but higher costs can be held responsible for the slack earnings.

Revenues fell 9.2% year over year to $2.23 billion in the reported quarter but beat the Consensus Estimate of $2.21 billion. Average realized price of gold declined 7.7% while gold production dropped 2.7%. All-in costs were up about 1% in the quarter.

The company is leaving no stone unturned to combat the recent upheaval in the gold bullion market. That’s why it slashed its quarterly dividend by 2 cents, planned a capex cut worth $2 billion, guided for reduced costs for the full year and is restructuring operations by ‘asset sales, joint ventures and streaming’. In a nutshell, the company appears to have chalked out its course of action in case gold prices slip further.

Investors valued its efforts and following earnings, the stock gained 5.20% on August 6, 2015. The stock added over 1% after hours.

Goldcorp’s Q2 Earnings in Focus  

Gold mining giant Goldcorp’s adjusted earnings of 8 cents per share for the second quarter beat the Consensus Estimate by a penny but declined from the year-ago earnings of 20 cents a share. Its revenues grew 34% to $1.19 billion and beat the Consensus Estimate of $1.10 billion.

Gold sales surged around 41.2% year over year to 903,000 ounces in the reported quarter, while production grew 40% to 908,000 ounces. All-in sustaining costs declined 0.7% in the quarter under review. Following the earnings release, Goldcorp shares have however gained 6.8% (as of August 6, 2015).

Newmont’s Q2 Earnings in Focus

Newmont’s second-quarter 2015 adjusted earnings were 26 cents per share, better than the Consensus Estimate by a penny. Earnings jumped about 30% from 20 cents earned in the year-ago quarter. Effective cost control and relatively approving exchange rates backed quarterly results despite subdued metal prices. Average realized gold and copper prices were down 8% and 20%, respectively, year over year.

Revenues grew about 5.6% to $1.9 billion in the quarter but fell shy of the Consensus Estimate of $2.03 billion. Following the earnings announcement, the stock has fallen 11.7% (as of August 6, 2015).

ETF Impact

All the aforementioned companies have considerable exposure in large-cap funds like GDX, iShares MSCI Global Gold Miners (NYSEARCA:RING) and PowerShares Global Gold & Precious Metals ETF (NASDAQ:PSAU).

For PSAU, GG, NEM and ABX take the top three positions, respectively, and combine to make up about 22% of the total assets. PSAU lost about 3.9% combining the impact of the trio’s releases, but was up over 2.4% on August 6.

RING also maintains the same allocation order. As much as 37% of RING goes to GG (14.61%) and NEM (11.57%) while ABX gets 10.38% allocation. RING retreated about 5.2% since NEM’s earnings but was up 2.3% on August 6 reflecting ABX’s possibilities.

For GDX, GG and NEM take the top two spots with a respective share of 7.51% and 6.19%. ABX is the fund’s fifth holding. GDX was off about 5% since July 22.

Bottom Line

The bottom of the discussion is that though the gold crash has become the talk of the town, gold mining companies can see a turnaround in any time. Moreover, positive drivers like policy easing in Euro zone, operational efficiency gains in a few companies and the safe-haven status of the metal might restrain it to repeat the 2013 Fed-induced sell-off this time.

This article is brought to you courtesy of Zacks.

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