Massive Rises In Tier 1 Gold Stocks - Even Better Than The Juniors!

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Includes: ABX, AEM, AU, AUY, FCX, GFI, GG, GOLD, HMY, KGC, NEM
by: Lawrence Williams

Summary

Even the gold mining majors have seen huge share price rises so far this year.

Many top gold stocks have more than doubled in four months.

But the stocks are mostly still hugely below recent highs. Does this suggest there is still massive upside potential?

In investing in a volatile sector like gold equities, timing is indeed almost everything.

Since the end of last year the stock price performance of many of the world's major gold mining stocks has been phenomenal. Gold is up around 14%, but some of these stocks have more than doubled - in one or two cases tripled or more. In short the kind of performance one might expect from gold mining and exploration juniors in the times of a rising metal price. However this performance mostly relates to how much these stocks were oversold in the gold price downturn - obviously hugely so. And almost all these stocks are still enormously off their pre-gold price crash highs which suggests there's definitely more potential upside to come.

For the table below we've taken the top 12 gold mining companies with main US$ quotes on one of the main boards with their stocks as quoted at the time of writing, and for the highs we've taken the highest price achieved in 2011. That is not necessarily the stock's lifetime high, but is that attained during the period over which we are comparing relative data.

Selected Gold Mining Majors - US$ Quotes

Company

US Ticker

Price end 2015 US$

Price 04/26/16 US$

% increase

2011 High

% rise to reach 2011 high

Barrick

ABX

7.4

16.1

+118%

52.8

228%

Newmont

NEM

18.0

31.1

+72.8%

68.9

122%

AngloGold

AU

7.1

14.6

+106%

51.0

249%

Goldcorp

GG

11.6

16.9

+46%

55.8

230%

Kinross

KGC

1.8

4.6

+156%

17.29

276%

Gold Fields**

GFI

2.8

4.1

+46%

15.37

275%

Agnico Eagle

AEM

26.3

40.6

+54%

70.4

73%

Sibanye**

SBGL

6.1

14.0

+130%

n/a

n/a

Yamana

YAU

1.9

4.2

+121%

16.8

300%

Freeport*

FCX

6.8

11.4

+68%

55.6

388%

Randgold

GOLD

61.9

91.4

+48%

109.6

17%

Harmony

HMY

0.93

3.2

+244%

15.6

388%

Click to enlarge

*FCX is primarily a base metals stock (copper) but is one of the world's largest gold producers so gold has a significant impact on its stock price.

** SBGL was spun off from GFI in 2013 so there's no comparable data for 2011, Similarly GFI prices are not directly comparable with the others in the table as a result

What the table shows is that most of the gold majors have been acting more like juniors in terms of their price surges in the recent rising gold price scenario. To a great extent this demonstrates that they had been hugely oversold during the downturn. Interestingly why those that have shown the smallest increases - Goldcorp (NYSE:GG). Agnico Eagle (NYSE:AEM) and Randgold (NASDAQ:GOLD) - is not so much that they have underperformed of late but were perhaps not sold down to the extents of their peers as they were seen by the markets as being the better performers in the difficult times the industry was experiencing. Thus the fact that they have appeared to have done far worse than their peers in the recent scramble for gold stocks is actually a reflection that they have been better regarded by the markets over the past five years. This may not actually be the case with Goldcorp, though, given its very big discount to its 2011 high price which is up there with Barrick (NYSE:ABX), AngloGold (NYSE:AU), Kinross (NYSE:KGC) and Yamana (NYSE:AUY). We've not included Gold Fields (NYSE:GFI) and Freeport (NYSE:FCX) in this editorial assessment as they are not directly comparable - see footnotes to the table.

Of the world's biggest miners the two standouts in the table as perhaps not showing the huge upside potential of their peers are perhaps Newmont (NYSE:NEM) and Randgold. The former was never sold down to the extent that its closest rival, the world No. 1 gold miner, Barrick, was, but this is probably a reflection on Newmont's lower debt and lower capital expansion project pipeline. Obviously sentiment will have been playing a part here. Barrick's hugely costly Pascua Lama project, currently on the back burner, will have been providing negative publicity. A similar sentiment effect on Kinross due to disappointing performance at the costlily-acquired Tasiast property in Mauritania will also have brought down its relative value. Randgold on the other hand with an ever-growing gold output, no debt and a very conservative gold price used in its internal assessments, together with a progressive dividend policy, had very much outperformed its peers so its price had never fallen to the same extent. Similarly it is not nearly so far below its high point, but should be treated differently from the other gold majors as still being in a continuing growth pattern with low cost gold output and not nearly as vulnerable to a price downturn should gold bears like Goldman Sachs' Jeffrey Currie prove to be correct.

Perhaps the most interesting stock in the listing is Harmony (NYSE:HMY) where the stock has risen a massive 244% since end 2015. Harmony struggles with a batch of South African marginal mines it has acquired over the years. But a rising gold price and a declining local currency, have transformed the company's economics, although it is probably the most vulnerable in the list should the gold price turn down again. In truth Harmony behaves more like a strong junior as far as its stock price is concerned.

So where does that leave us now in relation to further upside potential for the gold stocks? Always at the mercy of the gold price itself of course, but given gold and gold stocks are back on the institutional radar again there does seem to have been something of a sea-change in gold stock ratings. The big rises in price for the Tier 1 gold stocks, often outperforming the juniors, is very definitely in part down to the necessity of some major institutions recognizing that they do need to take on some gold-related equities, given the yellow metal had been talked down to such an extent over the previous three to four years that gold-related stocks had largely been dropped from their portfolios.

It is also worth noting that most of these Tier 1 gold stocks pay dividends and are nowadays mostly capable of earning profits even at sharply lower gold prices. They have all been concentrating on lowering costs and cutting debt and in many cases have also benefited from dollar strength against the currencies of the countries in which their operations are located, and also from lower oil prices. In terms of staying in business, because they are much more substantial companies than the juniors, they definitely have the edge and the percentage below their 2011 highs suggests there remains considerable upside potential in the stock price, although those kinds of levels may never again be achieved in real terms. But even a recovery to half those highs would mean substantial gains in what would appear to be much safer gold stocks. And we doubt we're likely to again see the degree of overselling which afflicted most of these between 2011 and 2015 which represented something of an inverse bubble scenario. Just as prices can get too high to be sustainable, so they can move too low as well.

So we do see still some good upside potential in the Tier 1 gold miners if current gold price levels are sustained, and especially if they begin to move higher again. We were looking last year at whether this was the time to get back into the key gold majors - see: Newmont, Barrick, Goldcorp: Is Now The Time To Buy?. We were around five months early into our advice then, but the principle was correct and those who did get back in will have seen substantial gains. The discounts to the 2011 highs also suggests it may still not be too late to invest in good gold stocks and make decent returns, but it may take a while to match the kinds of gains we have seen year to date. In investing in a volatile sector like gold equities, timing is indeed almost everything.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.