The gold market continues to cool down. The recovery of the U.S stock market is pulling investors out of safe haven investments and into the stock market. The leading gold producers are the first to suffer from this shift in market sentiment. Will shares of gold companies including Barrick Gold Corporation (USA) (NYSE:ABX) and Goldcorp Inc. (USA) (NYSE:GG) continue to decline? Will the upcoming financial reports of these companies pull their stocks up?
Gold Producers Continue to Struggle
Since the beginning of the year, shares of Barrick Gold Corporation (USA) (NYSE:ABX) tumbled down by almost 25%. Shares of other gold producers haven’t done much better:shares of Goldcorp Inc. (USA) (NYSE:GG) declined by 14.4%, and shares of Yamana Gold Inc. (USA) (NYSE:AUY) fell by 17.5%. In comparison, during 2013 (year to date) the S&P500 index rallied by 9.6%; the price of gold fell by 6.1%.
The silver lining for the tumble of these stocks is the rise in dividend yield of new investors:Barrick pays $0.80 per share per year, which comes to an annual yield of 3.05%; Goldcorp pays $0.20 per share annually, which comes to a yearly yield of 1.9%; Yamana offers an annual dividend of $0.26 per share – an annual yield of 1.83%. But the decline in the price of gold and the rise in production costs have dragged down the value of these leading gold companies.
Profitability, Growth and Dividend
The main components, in my opinion, that might draw investors towards holding gold producers’ stocks are the profit margins, revenue growth and dividends these companies have to offer. In regards to growth in sales and profitability these companies haven’t performed well.
The chart below shows the developments in the quarterly price of gold and the operating profitability of Goldcorp, Barrick Gold, and Yamana Gold Inc. (USA) (NYSE:AUY).
The mining costs continue to rise: for Goldcorp, in 2012, the total cash cost ($ per ounce) reached $874 compared to $653. This represents an increase of 33.8%. The production cost of Barrick (opens pdf) is expected to grow in 2013 compared to 2012:the all-in sustaining cash cost ($ per ounce) in 2012 was $945. In 2013 this cost is projected to range between $1,000 and $1,100 – an increase of 5.8% to 16.4%. If the price of gold will continue to dwindle, and the production costs will rise, the profit margin and revenue growth may fall.
In regards to growth, besides the changes in the price of gold there is also the change in production. On this front, several gold producers are expected to augment their production quota in 2013: Goldcorp Inc. (USA) (NYSE:GG) is expected to raise its gold production in 2013 compared to 2012 by a rate ranging from 6.4% to 16.9% (see here – opens pdf). Yamana is also expected to augment its production in 2013 from 1.2 million ounces to a range between 1.44 and 1.6 million ounces – an increase of 20% to 33.3%. On the other hand, Barrick Gold Corporation (USA) (NYSE:ABX) (see here – opens pdf) isn’t expected to raise its production in 2013 as its gold production will range between 7 and 7.4 million ounces. In 2012, the company’s production was 7.4 million ounces.
First Quarter of 2013
The upcoming publication of the first quarterly financial reports of these companies might shed some light on the progress of these companies. Considering the price of gold, one of the key components in determining the growth and profit margin of these gold companies, their performance in these aspects might not have improved from the previous quarters. Let’s examine the recent developments in the gold market.
Is Gold About to Make a Comeback?
The gold market continues to disappoint investors as the price of gold continues to trade down. Moreover, the leading gold ETF SPDR Gold Trust (ETF) (NYSEMKT:GLD) hasn’t been performing well and since the beginning of the year the ETF lost more than 10.8% of its gold holdings on account of the decline in demand for gold as an investment. The ETF’s price fell by 4.8% during the year to reach $152.81. This decline serves as an indicator for the drop in demand for gold as an investment. The launch of QE3, in which the Fed purchases each month $85 billion worth of long term securities, haven’t pull up the price of gold. People are still worried that US dollar will lose its value.
A recent article claims that several States in the U.S are moving towards gold as a legal tender. If these steps will be implemented (if these States will be able to bypass the legal issues involved) the price of gold might eventually resume its rally. If the U.S economy will pull back – the recent U.S employment report raised the concerns regarding the progress of the U.S economy – the price of gold might rally. In the meantime, the U.S dollar remains strong against leading currencies such as the Japanese yen and Euro. The decision of Bank of Japan to augment its asset purchase program is making the Fed’s asset program look conservative. The situation in Europe including the recent debt crisis in Cyprus is keeping the Euro weak. These events are likely to keep the U.S dollar from tumbling down in the near future. If the USD will remain robust, the chances of gold price rising become less likely.
The Bottom Line
I still think the gold market isn’t likely to make a comeback. This is likely to keep pulling down shares of these gold producers. Even if these companies will raise their production level, their profit margin will continue to dwindle, which will pull back investors from these stocks.
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Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.