Q2 earnings figures for the gold mining majors are now coming in thick and fast and are showing some strongly anomalous results. The extremes might be represented by Barrick Gold (NYSE:ABX), the world No. 1 gold miner which on the face of things has had a strongly positive quarter, as have world No. 2 Newmont (NYSE:NEM) and 3 AngloGold Ashanti (NYSE:AU), while on the downside, is Goldcorp (NYSE:GG) which has reported some pretty dismal figures. Others have come up with something of a mixture: Agnico Eagle (NYSE:AEM) has again been among the better performers, Yamana (NYSE:AUY) is showing an improvement and Kinross (NYSE:KGC) and Gold Fields (NYSE:GFI) somewhere in between. Randgold (NASDAQ:GOLD) is yet to announce its Q2 earnings, but is anticipated to show some positive improvements in line with the better Q2 gold prices received.
But what about investment timing if one is looking at the gold mining majors? It is well worth looking at stock price performances year to date, and those which have made the biggest gains may well find it tough to maintain this kind of progress in the months ahead, even if gold should rise further this year. ABX is up 174% year to date, NEM 131%, AU 200%, KGC 175%, AEM 110%, AUY 205%, GFI 124%, while GG is only up a rather dismal 49% in comparison. GOLD, where the stock price might be pushed one way or the other once its Q2 figures are announced, is up 88%. This one, though, is a bit of an anomaly as its apparently weaker performance year to date is almost certainly because it was not as oversold as its peers when the gold price fell from 2011 until the end of last year. Much of this has to be due to the company CEO, Mark Bristow's continually positive approach. GOLD doesn't have, for example, the huge debt burdens of most of its peers and it has been growing output throughout where others are beginning to see production falls due to asset disposals to help reduce their debt burdens.
So anyone invested in gold majors at the beginning of the year will have done pretty well, but it is interesting that following even very well received Q2 earnings, most of these companies are actually off their tops - even ABX which appears to have perhaps performed best of all in Q2. Obviously gold price fluctuations have something to do with this, but some have come out of the quarterly earnings season better than others. NEM for example was, at the time of writing, trading at a year to date high as was GFI and some others very close, notably AEM and AUY which both got a boost from Q2 figures. KGC has perhaps suffered most, at over 12% below its year to date high, although it has seen a bit of a pick up since its Q2 earnings figures were announced. GG is also down 12% from its high, but here its price, not surprisingly, fell back after its latest quarterly announcement.
What has to be encouraging for those who see a continuing long term gold price increase ahead is that all these stocks are still hugely below their peaks achieved when gold was on its way up to its $1900 or so high point in 2011.
So which of the gold majors offers perhaps the best potential gains in the medium term if one wishes to invest, or stay invested, in the gold majors as being a less risky end of the gold stock investment sector. Earnings-wise probably the safest stock is GOLD, but this does carry a political risk element given the locations of its mining operations in West and Central Africa. It has proved remarkably adept in managing these risks through maintaining good relationships with governments of whatever hue and investing heavily in sustainability bringing work, and something of a longer term future to the people in the remote areas in which it mostly operates - areas where previously employment was virtually non-existent - and thus generating continuing tax revenues for its host countries which had not been forthcoming beforehand. This has enabled it continue profitable operations even when there have been some traumatic political changes in some of the countries in which it operates.
But we see perhaps the best bet for gold stock investment for the medium term in Goldcorp which looks, in our view, to be a recovery stock par excellence. Despite its dismal Q2 figures, which saw a huge gold production drop and consequent big rise in its AISC figure, it has maintained its guidance for the year which suggests some very big improvements in Q3 and Q4, as the problems which led to the downturn, importantly a planned maintenance shutdown at its flagship Penasquito mine, are now behind it. As production rises back to nearer previous levels AISC will come back sharply too.
Why not Barrick or Newmont - the two giants in the sector you may ask? Despite assurances, they are going to have increasing difficulties in continuing their successful cost cutting programs. The easier cost reductions will already have been made and there is also a suspicion that the higher gold price may mean that their feet may be eased on the cost cutting pedal. That's human nature. Also the benefits from the weak oil prices which have been prevailing will likely start to come back as the oil price will inevitably start to pick up at some stage. Meanwhile perhaps the US dollar's strength (which does not benefit ABX and NEM to the same extent as most of their peers anyway given the high proportion of their gold output in the USA) may not continue. The miners have been seeing some good benefits from exchange parities in some countries in which they operate. Although the dollar has been seen as strong, the dollar index is, even so, some 4% lower than it was in December last year. There is a suspicion that the US Fed does not really want to see the dollar higher than it is now given its adverse impact on US exports which are under pressure anyway from the poor global economic statistics we are seeing.
So looking ahead we do see some potentially adverse factors for the big gold miners, which makes those in a recovery situation, like GG, likely to outperform providing it meets, or even gets close to, its targets. Most are also seeing a declining gold output - particularly those like ABX and NEM which have been using asset sales to bring their debt positions down, which cuts overall output. ABX for example is looking at a fall of over 1 million ounces in gold output, from last year's 6.15 million ounces, by 2018. With capital cost and exploration cost cutting as part of its cost reduction programs, opportunities for halting the production decline are receding.
NEM too will see a fall in gold and copper production ahead from the sale of one of its biggest mining stakes - in Batu Hijau in Indonesia, one of the world's largest gold/copper mines. Overall NEM's gold production will likely be flat to lower over the remainder of the decade and a fall in its copper output which is likely to be substantial, will also impact revenues in the years ahead.
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.