Mining stocks will enjoy a strong 2017, thanks to industry-wide trends toward improved free cash flow, upward earnings momentum and the potential to return excess capital to shareholders, Citi analysts say.
However, stocks in the group are not likely to see the same percentage increases as in 2016, and the odds of mining overperforming the rest of the market are weak, Citi says.
The firm believes the fear of missing out on another year of outperformance is more likely to win and draw more investors into the sector; its favorite stocks in the sector include Barrick Gold (NYSE:ABX), Teck Resources (NYSE:TECK) and Lundin Mining (OTCPK:LUNMF).
Overstuffed bears are taking some profits in gold and silver today as the strong November jobs report confirms what most already knew - the economy is cruising along and a rate cut is coming this month.
Gold is higher by 0.6% and sliver by 1.5%.
The precious metals miner ETFs: GDX +3.7%, SIL +4.1%
Precious metals miners are slammed as gold prices dip well below $1,300/oz. to settle at $1,269.70, its lowest since the U.K.'s Brexit vote in June, as upbeat U.S. manufacturing data yesterday has stoked expectations of higher interest rates.
Gold is “falling off the cliff,” says Naeem Aslam, chief market analyst at ThinkMarkets. “Traders are buying the equity market with both hands, especially over in the U.K.” as the British pound declines.
The previously hot gold miners had a tough time of it in August, even slipping into bear market territory yesterday. But the names are hot again to start off September, with the GDX higher by 3.5% today. Gold is up 0.4% to $1,317 per ounce.
S&P, meanwhile, is mulling the possibility of dividend hikes, noting shareholder pressure is likely to lead to higher payouts or share buybacks should gold prices remain near or above current levels. Newmont Mining (NEM +2.6%) has promised to revisit its capital return strategy, Gold Fields (GFI +5.3%) significantly hiked its interim dividend, and AngloGold Ashanti (AU +2.3%) is considering resuming dividends in 2017 after a three-year holiday.
The VanEck Vectors Gold Miners ETF (GDX +11.1%) surged more than 10% on heavy volume, and all 24 of the ETF’s U.S. equity components traded higher, with 10 of them enjoying double-digit percentage gains.
In a note to clients late yesterday titled “Nothing to fear but fear itself,” Goldman’s Jeffrey Currie says that the fear guiding global financial markets right now “ignore the facts that systemic risks from oil, China and negative rates are very unlikely.”
Currie says that the negative macro impacts from low oil prices have likely already played out and are not systemic; the spillover from the Chinese economy slowing down is limited; and that the U.S. economy is far from a recession.
“Financial markets have overreacted to the point that current inflation breakevens would require oil prices to keep declining for the next 7 years.”
“We believe that the sharp rise in gold prices this past week was mostly due to concerns over systemic risks, particularly in the banking sector, given the sharp correlation of gold prices with bank stocks and other measures of systemic credit risks. While this is a continuation of a trend established since the beginning of the year that started with systemic concerns over oil and China, we believe that these new fears like the past fears are not justified.”
Currie says we’re likely heading for a bounce once the market realizes that European banks, which are currently at the center of concerns over negative interest rates, are still able to fund themselves and that money markets are open with no evidence of strain in either euro or dollar funding.
Gold prices at five-year lows adds more pressure on an already stressed gold mining industry but mine closures are not expected to happen quickly as operators instead try to continue cutting costs, even as industry all-in costs already are expected to fall to an average of ~$1,335/oz. this year, down from nearly $1,700 in 2012.
Some significant mine closures could occur over time if gold stays near its current $1,100/oz. - as ~76% of producing gold mines are in the red at that price - but Goldcorp (NYSE:GG) CEO Chuck Jeannes says "I always warn people that [closures] are not going to happen as fast as you think they might because mine general managers are really good at keeping their mines alive."
With Newmont Mining (NYSE:NEM) kicking off earnings season for precious metals miners tomorrow, the current five-year compound return for mining equities is the lowest since the early 1980s; analysts are watching for potential dividend cuts at GG, Barrick Gold (NYSE:ABX), Centerra Gold (OTCPK:CAGDF) and Yamana Gold (NYSE:AUY).
Plenty of analysts are predicting further declines in gold's price; Goldman Sachs' Jeffrey Currie says the worst is yet to come, and that prices could fall below $1,000 for the first time since 2009.
The open bars, oysters, prime rib, rowdy parties, and luxury hotel suites are a thing of the past at the annual Toronto gathering of the Prospectors and Developers Association of Canada, having instead given way to chips and dip and Airbnb rentals thanks to the years-long slump in the sector.
"I’m really depressed that I have to drink bourbon versus single malt scotch, it just doesn’t do it for me," says Ben Cox, CEO of Aston Bay Holdings (check out a price chart; it's a bet his shareholders feel even worse). "Everyone is panicked in the industry. If you are not humbled this year, whether you work for a major or a junior or anyone in-between, you are insane."
"Flat is the new up," says another attendee. The gathering is "a little bit depressing," but a sign of the times.
The Ultra Gold Miners (NYSEARCA:GDXX) and the UltraShort Gold Miners (NYSEARCA:GDXS), which seeks to provide 2x and -2x the daily performance of the NYSE Arca Gold Miners IndexSM respectively.
The Ultra Junior Miners (NYSEARCA:GDJJ) and the UltraShort Junior Miners (NYSEARCA:GDJS), which seeks to provide 2x and -2x the daily performance of the Market VectorsTM Global Junior Gold Miners Index respectively.
“The mining sector is popular with tactical investors, we are pleased to offer the only ETFs providing 2x and -2x exposure to the leading gold mining indexes.” said Michael L. Sapir, co-founder and CEO of ProShare Advisors LLC in a statement.
Gold, silver, platinum and palladium are spiking today on Switzerland's surprise move to abandon its currency floor, and shares of the miners are following suit: GDX +6.1%.
"Gold is much stronger as the 'safety' of the Swiss Franc vanishes,” commented Dave Lutz of JonesTrading.
Peter Boockvar believes that in "a world of currency battles with printing presses that are extraordinarily large... gold will be the last man standing... the gold bear market is over and will go substantially higher from here."
Against a backdrop of concerns about global growth, deflation and renewed volatility, gold has been climbing since November as other growth-sensitive commodities such as oil and copper have sold off.