Announcing the End of the Bear Market for Gold Stocks

You wouldn't know it yet by charting these broadly abandoned stocks, but a major sea change is under way in the gold mining industry that I believe is setting the stage for a rally of legendary proportion.

Given their disastrous trailing track record of amateurish value destruction and mind-boggling failure to project or adapt to escalating cost structures, the gold miners at large are entirely deserving of the cold shoulder they continue to receive from investors large and small. As Barrick Gold (NYSE: ABX  ) CEO Jamie Sokalsky conceded this week in his company's year-end earnings release: "Rising costs, poor capital allocation and the pursuit of production growth at any cost in the industry have led to declining equity valuations across the sector. The message is clear: the industry must chart a new path forward."

Of course, we're well beyond mere words at this point. That's why I'm pleased to report that the major miners of gold worldwide are finally leading a concerted charge to mend their broken ways by fundamentally altering the way they conduct their business. These overdue adaptations will carve out some much-needed breathing room between the prevailing price of gold and an all-in cost structure for the industry that -- once mine construction costs are factored in -- leaves precious little meat left on the proverbial bone.

Why 99% of you will miss the bottom by a mile
I will dive into the specific changes they're making in just a moment, but first I would like to pause and offer a Foolish prediction. When the history of this ongoing secular bull market is ultimately written with the clarity of hindsight, one standout feature of standout rally in gold stocks that will begin during 2013 will be the minuscule segment of the retail investor demographic that enjoys the full measure of the move. It's lonely here in the gold market at the moment.

That will soon change as gold finally breaks out of this prolonged consolidation, and fresh eyes fall upon a much-reformed mining industry that has sunk into a deep depression of distressed asset valuations. The smart money will again be chasing these gold stocks before long, but only after substantial momentum has been maintained. Retail investors will again clamor into the fold as they have before, but not before those in position today have enjoyed the memorable gains that can accrue quite quickly during the initial phase of a major gold rally.

I suspect that plenty of folks will regret having permitted gold stocks to fall off their radar during the present period, and I don't want you to count among them. If you ask me, the opportune time to pick up shares of Sabina Gold & Silver (NASDAQOTH: SGSVF  ) -- my top gold stock recommendation for 2013 -- is not once it has promptly reclaimed the $2.80 mark last touched just a few weeks ago but rather near the current mark of $2.08 . I've offered what I think are 5 good reasons to leap into Goldcorp (NYSE: GG  ) , but odds are that few will jump into action before the stock reclaims the $40 mark.

Now back to the gold miners' value-building reform movement
What began as a whimper of apologetic rhetoric from embattled CEOs has swiftly transformed into an observable correction of the major mistakes that plagued their past performance. The most glaring shift can be found in the wholesale reductions in previously budgeted expenditures of growth capital. Barrick Gold just slashed $4 billion in spending from its plans and announced that, "In today's challenging environment, Barrick has no plans to build any new mines." The world's largest producer of the metal now seeks only an 8% total increase in production over the next four years, and will shelve any intention of expanding beyond 8 million ounces of annual production .

Barrick also joined the crowd of major miners slashing valuations for recently acquired assets to reflect broadly diminished expectations for their economic performance. In Barrick's case, the offending asset in focus is the Lumwana copper mine at the center of the company's ill-fated $7.7 billion acquisition in 2011. Higher projected costs at Lumwana -- where "fully allocated" costs for 2013 are expected to reach an alarming range between $3.20 and $3.60 per pound -- prompted a $3 billion writedown within total impairments during the fourth quarter of $4.2 billion. Those non-cash impairments drove Barrick's dismal $3.06 billion loss for the fourth quarter, but adjusted profit managed to beat analyst estimates with profit of $1.11 for each of the company's 1 billion shares outstanding .

Smaller rival Kinross Gold (NYSE: KGC  ) knows a thing or two about conceding embarrassing reductions to the value of acquired assets. With a further $3.09 billion impairment recorded for the fourth quarter on the company's Tasiast project in Mauritania -- atop a prior impairment logged one year ago on the same asset, Kinross has now ceded $5.58 billion (or 79%) of the $7.1 billion shelled out for the gold industry's most notoriously misguided acquisition. Now under new leadership, Kinross has finally begun to chart a more attractive road forward .

Gold Fields (NYSE: GFI  ) chose a different path to reform that's better suited to the specific challenges presented by its maturing assets in South Africa. The company has spun out those assets into a separate listing called Sibanye Gold, which will substantially ease the company's battle with elevated all-in costs of production as it unlocks some of the meaningful growth potential of its existing mine portfolio.

Almost in unison, this battered industry has finally sprung into action to reverse the tide of woeful failures to capitalize on the elevated price environment for gold. Broadly speaking, I strongly believe that we're now hammering the final nails into the coffin of a bizarre cyclical bear market for gold stocks that has occurred straight through the first decade of this ongoing secular bull market for gold. When this tide turns, and both gold and gold equities enter bull-market breakout mode in unison, the results could be something to behold. Rather than chasing these stocks once the momentum rushes in, I encourage Fools to take advantage of the profoundly negative sentiment still in force here to get in on the ground floor.

Goldcorp's low-cost production of one of the most sought-after metals in the world continues to make them an attractive choice for long-term investors. Click here for our detailed ticker report to discover more about my No. 1 pick among the major miners of gold.


Read/Post Comments (5) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 18, 2013, at 2:56 AM, SilverSqueeze wrote:

    Chris -

    I know that you are very constructive regarding Silver Wheaton. I think that during the past week, two possible overhangs on the stock were greatly minimized.

    1) Barrick reiterating that they were totally committed to the completion of the Pascua Lama mine. A cornerstone stream for SLW.

    2) GoldCorp reporting that they almost achieved full year 2012 production guidance at the Penasquito mine even after severe setbacks in 2012 due to drought conditions that affected the mine's water supply. This is also a SLW cornerstone asset.

    This should be very positive for the future price action with SLW's stock, once we find our way clear of the current consolidation period affecting the price of the silver commodity.

    Your thoughts.

  • Report this Comment On February 19, 2013, at 3:52 PM, RegLeCrisp wrote:

    I must have missed the part that explained exactly what will be attractive about gold stocks. Is it only the chart?

  • Report this Comment On February 20, 2013, at 9:49 AM, daffodilsaregold wrote:

    Just bought some more Sabina at $2.02. This is so hard to do when the sky is falling. Hmmm, it does feel lonely.

  • Report this Comment On February 20, 2013, at 3:10 PM, johngalt12 wrote:

    What I would really like to know is, why do the miners continue to sell their product at undervalued prices? They should be withholding some of their production from the market until prices more accurately reflect the fiscal and monetary reality that the world is currently in. How can any business remain solvent if they sell their product at a deep discount? As long as they're giving it away, just keep buying their bullion, and stay away from their shares.

  • Report this Comment On February 23, 2013, at 12:41 PM, texasflyfish wrote:

    It is unlikely with all of the money printing going on and the constant demand for bullion in Russia, China, and India that gold prices are going to go down. With improved production it is highly likely that the smart gold and silver miners will increase their profit. Buy what no one else seems to like and wait for the turn-around. The leaders like Christopher Barker may feel lonely sometimes, but there are others following his lead. In typical fashion the crowd will wake up and start buying long after the rally has started.

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