Gold Stocks Face Headwinds

by: The Gold Stock Strategist

Despite positive news expected on the earnings front, gold stocks could be volatile this week and into the summer based on global financial uncertainty.

Gold mining stocks have been beaten down since mid-January, with the Market Vectors Gold Miners ETF (NYSEARCA:GDX) sinking about 14 percent. Gold producing stocks backfilled what had been a 18 percent drop by climbing 3.6 percent, riding the wave of a 2.3 percent gain in the yellow metal for the week.

Four gold producers are scheduled to release earnings this week including IAMGOLD (NYSE:IAG), Agnico-Eagle (NYSE:AEM), Kinross Gold (NYSE:KGC), and Barrick Gold (NYSE:ABX). Based on earnings results already reported for many gold producers, investors are expecting solid profits to be reported. But that may not translate into higher share prices if recent experience is any guide.

Three gold producers already reporting earnings in February have shown positive results for Q4 2009. Higher gold prices in the fourth quarter helped boost top-line and bottom-line growth. Yet stock prices declined on earnings announcement day.

Earlier this month, South African-based Gold Fields (NYSE:GFI) announced a 44 percent gain in profits compared to the previous quarter, driven higher by a rising price of gold price in the fourth quarter. Shares of Gold Fields closed down 6.7 percent for the day with gold dropping 4.1 percent. Gold Fields also announced it was projecting lower gold production for Q1 2010 compared to Q4 2009. Gold Fields CEO Nick Holland also addressed investor fears that South Africa is considering nationalizing gold mines in the country.

Just last week, African producers Randgold Resources (NASDAQ:GOLD), and Harmony Gold (NYSE:HMY) reported higher net income for the fourth quarter of 2009, again, boosted by a higher price of gold for the quarter.

West Africa-focused Randgold announced record production for the quarter and annual production growth of 14 percent for 2009 over 2008. Annual earnings increased a stellar 79 percent, due to record gold production at its “flagship” Luolo gold mine in Mali, Africa. Despite the positive news, Randgold shares traded down 2.6 percent for the day along with Barrick Gold (-3.5%), Newmont Mining (NEM, -3.9%), Goldcorp (GG, -3.1%), and Yamana Gold (AUY, -4.3%).

After the closing bell on the same day as Randgold reported earnings, South African miner Harmony Gold reported a 44 percent increase in operating profits despite a 1.2 percent fall in gold production. Harmony attributed the stronger earnings to a higher South African rand and lower cash costs. In line with a weaker gold price for the day, the company’s shares fell by 0.5 percent.

Ironically, good fourth quarter results were met with sell offs in the shares of Randgold, Harmony Gold, and Gold Fields on lower price of gold and in the case of Gold Fields, negative operating news for Q1 2010.

What can investors expect with Agnico-Eagle, Kinross Gold, IAMGOLD, and Barrick Gold as they report fourth quarter results this week?

Before the market opens on Wednesday, IAMGOLD is scheduled to announce earnings. A fourth-quarter per share profit of 16 cents is expected, up from 6 cents for the same quarter a year ago. IAMGOLD has announced plans to increase gold production to nearly 1 million ounces in 2010, up from 939,000 ounces in 2009. Uncertainty about IAMGOLD’s ability to meet guidance increased with the announcement in early January that CEO Joe Conway would abruptly step down. The company has had great success recently at reducing costs and investors are looking for this trend to continue.

Agnico-Eagle reports after the market close on Wednesday. Analysts expect fourth-quarter earnings per share of 25 cents, compared with a loss of 1 cent per share in the same quarter a year ago. Agnico-Eagle has experienced significant setbacks as they ramp up production projects to take advantage of record gold prices. The company reported a loss of 11 cents per share for the third quarter of 2009, disappointing investors. Despite positive analyst expectations, Agnico-Eagle could disappoint if higher capital expenditure requirements and higher operating costs diminished earnings in the fourth quarter.

Kinross Gold is also scheduled to announce earnings on Wednesday after the closing bell. Kinross’ consensus estimate is for a fourth-quarter profit per share of 16 cents, up from 9 cents during Q4 2008. Kinross is also experiencing build out delays resulting from gold ore that is harder than expected at its Paracatu mine in Brazil. Kinross investors remain anxious about 2010 as a result of delays in Brazil and at other projects.

On Thursday, Barrick Gold reports before the market opens. Analysts are expecting fourth-quarter profit of 59 cents per share, up from 32 cents a year ago. Of all the major gold producers, Barrick is the most likely to beat estimates. Barrick remains a top pick in the Gold Stock Strategist newsletter. Announcing the removal of their fixed gold hedges on December 1, 2009 was a positive for Barrick. Since then, about one-third of company analysts have raised the company’s 2010 estimates. 2010 earnings are expected to surge about 25 percent over 2009. Moreover, Barrick has a recent tendency to report positive earnings surprises.

The macro environment remains uncertain with continued mixed economic news out of the United States: retail sales are up, the unemployment rate is down, while consumer sentiment is falling. Economists are forecasting a slow down for the U.S. economy in the second half of 2010.

The greatest uncertainty for the U.S. dollar and the price of gold is what the euro zone will do about the sovereign debt problem in Greece and other European nations. News of a rescue package for Greece by euro zone members could roil the euro, boost the dollar and drive the price of gold lower this week.

Uncertainty also surrounds a surprising bank policy out of The People’s Bank of China (PBOC) last Friday. The Chinese central bank unexpectedly raised bank reserve requirements for the second time in 2010. Traders are digesting the impact of this event with commodities trading in a narrow range today. Backlash from this hawkish move could lead to a further liquidation of dollar-denominated assets—including gold.

It is too early for gold stocks to move strongly higher given uncertainty about the U.S. economy, continuing sovereign debt problems in the euro zone, and China's surprising tightening of banking regulations in 2010. There appears to be more risk than reward in gold stocks for the next month and into the summer. Of course, emerging geo-political events in Iran, Afghanistan, and the Middle East add to the uncertainty of gold and gold stocks.

Uncertainty on the global financial scene could continue to roil the markets. We could see a volatile ride up and down for miners of the yellow metal this week and over the next months, even with positive news on the earnings front.

Disclosure: No positions