Will Gold Stock Earnings Surprise Anyone?

By Brad Zigler

The equity market's gotten a big boost by earning surprises such as last Thursday's early profit report from Wells Fargo & Co. (NYSE: WFC). The Dow Jones Industrial Average spiked 250 points, or 2%, on the news that the bank expected a $1 billion increase from year-ago earnings.

With earnings season ramping up, the chattering classes are deep in speculation about the next big surprise on the horizon. Goldman Sachs' number came as a surprise Monday, but there was a strong hint a couple of weeks ago from a rather surprising quarter - gold mining.

Gammon Gold, Inc. (NYSE: GRS), a Nova Scotia-based operator of two Mexican mines, whiffed the green eyeshade set with a March 25 release showing earnings 40% higher than forecast. The surprise contributed to a 4% one-day spike in the NYSE Arca Gold Miners Index.

Presently, there's a freshening breeze blowing at the back of gold stocks that's pushing the sector's performance ahead of bullion's. Since the equity market turned buoyant five weeks ago, gold stocks have gained nearly 7%, while bullion prices slumped 3%. That performance differential has been reflected in the shrinking price multiple of the SPDR Gold Shares Trust (NYSE Arca: GLD) over the Market Vectors Gold Miners ETF (NYSE Arca: GDX). The ratio, which peaked at more than 4-to-1 when the banking crisis broke open, has been since nearly halved.

Gold (GLD)/Gold Stock (GDX) Ratio

One has to wonder about the likelihood of more earnings surprises like Gammon's. Earnings are notoriously volatile for gold miners. So, too, is the degree to which analysts' projections over- or undershoot the companies' actual profits.

More than a third of the constituents of the NYSE Arca Gold Miners Index are due to report earnings in the coming month. The earnings track record of the 10 largest, each with a market capitalization over $1 billion, may provide us the means for handicapping the odds of earnings surprises this season.

In the last quarterly go-around, covering 2008's fourth quarter, six out of the top 10 miners produced greater-than-expected earnings, a vast improvement over the preceding two quarters when only one issue beat Street estimates.

The three largest producers all cranked out single-digit surprises. Barrick Gold (NYSE: ABX) outdid forecasts by nearly 7%, Goldcorp Inc. (NYSE: GG) bettered fourth-quarter expectations by more than 9% and Newmont Mining Corp. (NYSE: NEM) earned 4% more than projections. Smaller companies - Yamana Gold, Inc. (NYSE: AUY), Silver Wheaton Corp. (NYSE: SLW) and Royal Gold, Inc. (Nasdaq: RGLD) - cranked out disproportionately larger surprises, in part because of their smaller EPS baselines.

The median surprise number in the fourth quarter was a positive 5.4%, but that belies the tremendous variance among the 10 issues' performance. The quarter's mean surprise number was, in fact, a negative 38.7%, brought low largely because of an outsized loss cranked out by AngloGold Ashanti Ltd. (NYSE: AU). AngloGold has been one of the more volatile earners in the index's top 10. Three quarters earlier - that is, the period ending March 2008 - the company's earnings outperformance put it well ahead of the other three firms then beating analysts' expectations.

Gold miners delivered less-than-stellar results in the June and September 2008 quarters: Just one company outperformed guesstimates in each of those periods.

Only three miners have, in fact, managed to crank out positive mean earnings surprises over the past four quarters: Newmont Mining, Yamana Gold and Royal Gold. Given the variance in market conditions over the past year, though, a better baseline can be developed by using an exponential moving average [EMA] of earnings surprises. An exponential average weights recent results more heavily than those of the more distant past. Gauged by EMA, fully half of our top 10 companies exhibit a positive trend.

If we adjust the current Street estimate for each company by the EMA of earnings surprises, we can get an idea of likely numbers, assuming these companies produce trend line profits.

No guarantees, of course.

NYSE Arca Gold Miners Index Constituent Earnings Horizon

Company	Ticker	Market Cap ($ Bn)	Earnings Due	Earnings Surprise EMA (%)	Consensus EPS ($)	Adjusted Consensus EPS ($)
Barrick Gold Corp.	ABX	24.93	29-Apr	1.4	.36	.37
Goldcorp Inc.	GG	21.63	7-May	-6.6	.13	.12
Newmont Mining	NEM	20.44	30-Apr	11.2	.39	.43
AngloGold Ashanti	AU	11.15	15-May	-371.6	.45	-1.22
Kinross Gold Corp.	KGC	10.39	5-May	-25.8	.12	.09
Agnico-Eagle Mines	AEM	7.66	29-Apr	-11.5	.10	.09
Gold Fields Ltd.	GFI	7.03	7-May	-60.6	.10	.04
Yamana Gold, Inc.	AUY	5.94	5-May	16.3	.66	.77
Silver Wheaton Corp.	SLW	1.96	11-May	9.4	.06	.07
Royal Gold, Inc.	RGLD	1.26	7-May	102.8	.07	.14
Total		112.39			2.44	.89

The Street's looking for $2.44 in earnings out of these 10 companies, but our model says the trend line surprise number is more likely 89 cents; 63.5% less than expectations.

Here's where we have to season our probability stew with that proverbial grain of salt. Nothing, of course, says earnings have to perform to the trend line. And even if they did, do you trust the trend line? After all, AngloGold's recent under-performance is a B-I-G drag on the bottom line. If we discount AngloGold altogether we, in fact, end up with a positive 6.4% aggregate earnings surprise.

Forecasting earnings, as many analysts know, is part art and part science. The science bit subjects the reality of a company's financial data to mathematical manipulation. As for the other part, well, perhaps French playwright Francoise Sagan said it best: "Art must take reality by surprise."

Comments

[Mistrofan:]

Sure - because the energy prices were low in Q1.

Apr 16 10:35 PM

[nmelendez:]

I sure hope gold goes down so i can buy more on the cheap!!!

Apr 16 11:18 PM

[chux08:]

Sounds like he's saying you'd be better off buying Yamana, Silver Wheaton or Royal Gold shares and I think his chart says the same thing. I sold my shares of SLW about 10 days ago for a nice 26% profit and then they dipped back down to where I sold em, earlier today. So guess what I bought....again? Not as many as I sold but I guess we're made for each other. I added more AUY shares today also, as well as a couple more LOW PRICED GLD ounces. It's good to be diversified....in precious metals!!
Great article, thanks!

Apr 17 12:50 AM

[D. McHattie:]

I don't like to be critical but this is pretty superficial stuff. Trying to predict whether gold miner earnings will exceed expectations based upon whether they have in the past. Talk about looking in the rearview mirror.

Apr 17 08:26 AM

[Brad Zigler:]

Expectations--and how they're met--are especially critical at market turning points. In a perfect world--for analysts--company earnings would match forecasts. There'd be, as a result, no reaction trade. But that doesn't happen. Company earnings DO surprise analysts and traders; the market DOES react to these surprise.

All that's being done here is to attempt quantification of a risk factor. Traders facing a known risk, then, can take steps to avoid or counteract it.

How superficial is THAT?

Apr 17 09:04 AM

[GMiki1:]

And then another turning point comes and it's all different again. What's the turning point? A technical chartist's hidden pivot? An international incident? Or do these two strangely coincide? Hold a few gold and silver stocks as well as physical. The PMs have gotten beaten up this week so buy.

Apr 17 10:55 AM

[Brad Zigler:]

Well, differences are what makes a market a market. Circumstances change, as do market participants' viewpoints.

We're all dealing with perceptions of value. Manny's sense of value is not the same as Moe's or Jack's.

Issuing the fiat "buy" could well be inappropriate for certain individuals.


On Apr 17 10:55 AM GMiki1 wrote:

> And then another turning point comes and it's all different again.
> What's the turning point? A technical chartist's hidden pivot? An
> international incident? Or do these two strangely coincide? Hold
> a few gold and silver stocks as well as physical. The PMs have gotten
> beaten up this week so buy.

Apr 17 11:14 AM

[HardwoodFlo...:]

There's nothing wrong with owning Gold Stocks (e.g miners Rio or BHP) but the idea of owning gold as an investment is idiotic. It makes me laugh. It's so Y2K: "buy gold, stockpile guns, get ready for civil unrest". To have Koogerrands(sp) is funny or a novelty but to invest in physical gold is absurd - unless you live in a third world country and have to get out or a country where women have no property rights so all they have is jewlery.

Apr 17 12:22 PM

[HardwoodFlo...:]

Freya- is that what you learned on CNBC's Fast Money? Those shallow losers who say stuff like "buy the rips- sell the dips". They are turning the whole thing into a Casino. It's disgusting- and ultimately ruiness. What tools.

Apr 17 03:34 PM

[RiskReturnO...:]

CNBC is teaching the purple crayon rule ... and telling people that GLD has put in double top, and will break down much lower soon.

Not sure fundamentals support that view, but concerned their millions of viewers will take their advice. Maybe we wait for those amateurs to exit the gold market, and we BUY, BUY, BUY more, until the eventual 1000+ target is achieved.

Apr 18 12:43 PM

[Brad Zigler:]

Well, there was a LOT of technical damage done to bullion this past week. Spot gold loco London broke below its October-February trendline; the nearby COMEX contract cracked through its 100-day moving average and is now within a day of taking out its 200-day moving average.




On Apr 18 12:43 PM RiskReturnOptimizer wrote:

> CNBC is teaching the purple crayon rule ... and telling people that
> GLD has put in double top, and will break down much lower soon.
>
>
> Not sure fundamentals support that view, but concerned their millions
> of viewers will take their advice. Maybe we wait for those amateurs
> to exit the gold market, and we BUY, BUY, BUY more, until the eventual
> 1000+ target is achieved.

Apr 18 02:06 PM

[Brad Zigler:]

For futures traders in the June COMEX contract, the $850 level's in view.


On Apr 18 02:06 PM Brad Zigler wrote:

> Well, there was a LOT of technical damage done to bullion this past
> week. Spot gold loco London broke below its October-February trendline;
> the nearby COMEX contract cracked through its 100-day moving average
> and is now within a day of taking out its 200-day moving average.
>
>
>

Apr 18 03:46 PM

[Brad Zigler:]

Bears are looking for a test of the $767 level in June futures.

Apr 18 07:32 PM

[Freya:]

Buy whats going up, sell whats going down.

Its not a Buy and Hold market anymore.

Apr 17 02:49 PM

[Freya:]

NXG went up yesterday bucking gold's drop.

While silver has been waffling with Gold, Silver Miners like HL and CDE move more to the upside and less to the downside.(Ruff likes both)

The Juniors are outperforming the Majors, at least these 3 are.

Apr 17 02:25 AM