Listed gold stocks lose their mojo

Prices are back to year-ago levels, and in some notable cases, to levels first seen in 2003

JOHANNESBURG - 

Measured on a 12-month rolling basis, listed gold stocks are on average trading at levels seen a year ago. Looking at NYSE prices, Barrick, the world's biggest gold miner on a number of metrics, is trading around USD 37.00 a share, a level it first breached during the third quarter of 2007.  Newmont, the second biggest by production, is trading around USD 46.50 a share, a level it first crossed during the fourth quarter of 2003.

 Goldcorp, a relative newcomer to the big gig league of global gold diggers, is trading around USD 36.50 a share, a level it first cracked during the second quarter of 2006, nearly four years ago. AngloGold Ashanti, the third biggest gold miner by output, is around USD 34.50 a share, a level first breached in mid-2003. Times change, but not much for certain stock prices.

Listed gold stocks have been sloughing south, most recently, since the second week of December 2009, just after gold bullion pushed through to fresh all time nominal peaks around USD 1,227.00 an ounce. Current prices are around 11% off that high, but a selection of a dozen major gold miners have now retraced by an average of 24% from 12-month highs, measured on a weighted basis.

One of the main headwinds for dollar gold bullion prices continues to be the dollar. The dollar index is currently trading around its best levels since July 2009. Given indications, not matter how tentative, that US interest rates could be commencing a tightening cycle, the dollar could continue gaining. That implies a bear zone, of unknown duration, for the dollar gold bullion price, which has displayed a convincing inverse correlation with the dollar for the past 15 years. For nearly three months now, pricing patterns of listed gold stocks have been anticipating a bear zone for dollar gold bullion prices.

At the corporate level, the latest round of gold company reports for the fourth quarter of 2009, and for 2009, have hardly inspired. Despite the seventh successive year of rising bullion prices, established gold producers continue to grapple with the objective, such as it is, of producing convincing levels of free cash flow. On the contrary, 2009 saw a slew of rights issues by gold companies, headed by the USD 4bn raised by Barrick, mainly to attack its hedge book.

Fresh equity, and sometimes convertibles, and rarely bonds, were raised by Goldcorp, Newmont, Lihir, Newcrest, Kinross, Harmony, AngloGold Ashanti, and, beyond the major league, by Iamgold, Agnico-Eagle, Red Back, Osisko, Randgold Resources, Centamin Egypt, Great Basin, Jaguar, Alamos Gold, among others. Heavy capital expenditure commitments undertaken by gold companies as bullion has notched up one record year after another are yet to deliver any real dividends.

Among speculative favourites in the gold sector, impressive profit taking has been noted at some of the hottest names, including Australia's Sandfire Resources, now 21% off its peak price, and Ventana Gold, which has experienced a compression of a third of its market value.

Over the past 12 months, only one global mining subsector has overshot the underperformance of gold stocks. That dubious achievement goes, as always, to the relatively small primary silver grouping, which holds an aggregate global market value of USD 25bn, compared to nearly USD 300bn for primary gold producers. Fresnillo, the biggest of ranked primary silver miners, is down 21% from its London highs.

There has also been portfolio switching towards mining subsectors which have appeared oversold, and which have continued to benefit from refurbishment courtesy of a rising underlying metal price. Listed nickel stocks are currently at the top of that game.

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