If you own precious-metal mining stocks, there's a pretty good chance you're having a bit of a rough day. As of 2:00 p.m. EDT, spot gold was down about $9 per ounce, to $1,229, marking a six-week low, while silver was down for its 14th time in the past 15 trading sessions, losing another 1% today, to $16.30 per ounce. It's the lowest spot silver has traded in more than four months.
Here's why gold and silver stocks are being routed
To begin with, U.S. economic data continues to come in strong and appease Wall Street analysts. Earlier today, jobless claims fell by a pretty sharp 19,000, to 238,000, in the week that ended April 29, implying that the jobs market remains healthy. Steady gross domestic product (GDP) growth and a low unemployment rate provide a degree of certainty and calm for investors, which tends not to favor safe-haven investments like gold and silver that thrive off uncertainty and weaker growth environments.
Secondly, we've been witnessing a greater than one week carryover in weakness tied to the French elections. Most polls suggest that Emmanuel Macron, the centrist candidate, has a good shot at winning the French elections. Macron is a pro-European Union candidate who's a stark contrast to the extremist Marine Le Pen, who has expressed her desire to remove France from the EU. The possibility of a Le Pen victory and the collapse of the EU fueled gold's and silver's rally in April, but it's looking unlikely that Le Pen will be the next French president.
A third issue for precious metals is today's passage of the American Health Care Act (AHCA) in the House of Representatives, which gives the Trump administration more breathing room when it comes to tax reform. These tax reforms are viewed by Wall Street as critical to Trump's plan to generate consistent 3% GDP growth. In other words, this would add a little more certainty to the tax reform process -- and once again, gold and silver typically don't do well when certainty creeps into the equation.
And finally, yesterday's decision from the Federal Reserve to leave its federal funds rate unchanged did little to calm the nerves of precious-metal investors. The Fed left more than enough clues on the table that an interest rate hike may be coming in June, especially if U.S. economic data continues to be strong.
As interest rates rise, and the corresponding yields on interest-bearing assets move higher in tandem, it makes gold and silver, which have no yields and pay no dividends, far less appealing. This lowered demand for gold and silver can push their spot prices lower.
Today's damage report, and reasons for hope
The result is a nearly industrywide drop for gold and silver stocks, with a handful of names being hit especially hard -- a majority of which just reported their quarterly results. Here are a few of the most notable moves lower today:
- Silver Standard Resources (NASDAQ: SSRI): down as much as 11%.
- Yamana Gold (NYSE:AUY): down as much as 10%.
- Endeavour Silver (NYSE:EXK): down as much as 10%.
- First Majestic Silver (NYSE:AG): down as much as 10%.
- Alamos Gold (NYSE:AGI): down as much as 10%.
- Richmont Mines (NYSE: RIC): down as much as 10%.
With gold and silver moving to respective six-week and four-month lows, it's not hard to understand why these companies are hurting. Their margins are based on the average selling price of these underlying metals. Furthermore, exploration and expansion is often dependent on a healthy metals market. If precious-metal prices continue to fall, it could throw a monkey wrench into the mine development and expansion plans for these aforementioned companies.
However, if we dig a bit deeper beyond just the reasons why spot gold and silver are moving lower, we can also see catalysts that could push these stocks higher.
On a macroeconomic level, inflation has been creeping higher. Generally, gold and silver tend to do well when inflation is on the rise, which acts as something of a hedge against rising interest rates. Remember, higher interest rates increase the opportunity cost of owning gold and silver, dragging precious-metal prices down.
There are also numerous question marks about whether or not Trump's economic plan and a Republican Congress can deliver on their growth promises. With no prior political or military experience for President Trump, gold and silver investors should remain privy to plenty of uncertainty still to come.
On a fundamental basis, all of these mining companies have made major strides over the past couple of years to cut costs and fund only their highest ore-grade projects. The result is these miners are much leaner and more efficient than they've ever been. In fact, most are valued quite attractively.
Let's have a quick look at the four companies that reported their quarterly results today, and why you should consider brushing off the pessimism surrounding today's trading action.
This is really a gold company now
First, Silver Standard Resources, a personal holding of mine, followed in the footsteps of most mining stocks this earnings season and handily topped the consensus estimate. For Q1, the company generated $117.9 million in sales, up from $101.5 million in the year-ago period, helped by its acquisition of Claude Resources and the Seabee mine, and higher average selling prices for its underlying precious metals.
In terms of profit, Silver Standard produced $0.17 in earnings per share (EPS), which was $0.05 better than expected. With the company recently approving a joint venture in Argentina that'll extend the life of its Pirquitas property for another decade, and levering itself heavily to gold, which has held up far better than silver of late, the move lower today is puzzling. This Fool still sees plenty of value in Silver Standard at these levels.
A major uptick in production and cash flow is around the corner
Yamana Gold announced a less than 1% rise in year-over-year sales in its Q1 report, to $403.5 million. The company benefited from a rise in metals prices, but adverse movements in the Brazilian real and Chilean peso, along with lower grade recovery in its Chapada mine, hurt results. It produced a loss of $0.01 per share, which was $0.02 shy of expectations that had called for a $0.01 per-share profit.
While that may not sound great on the surface, Yamana Gold also raised its production outlook for all six of its producing mines, to 940,000 ounces of gold from its prior guidance of 920,000 ounces of gold. Optimizations at Chapada should help boost its 2017 production in the second half of the year, while Yamana prepares to commission its Cerro Moro, C1 Santa Luz, and Suruca developments in 2018, 2018, and 2019, respectively. In other words, Yamana is on the verge of a major boost in production and cash flow.
No red flags here
Alamos Gold wound up topping Wall Street's expectations on both fronts. It delivered a 16% increase in sales, to $121 million, which was a result of an increase in production at its Young-Davidson and Mulatos mines, as well as higher average selling prices. It also reported breakeven EPS ($0.00), which was better than the expectation of a $0.01 per-share loss.
Alamos' quarterly report had everything any long-term investor wants to hear. Production growth is expected throughout the year along with lower costs. Also, its proven and probable reserves increased by 1.8 million ounces (31%), and its phase 1 production of La Yaqui remains on track and set for initial production in the second half of this year.
This low-cost miner is delivering solid results
Lastly, mid-level gold-mining company Richmont produced $33.8 million in sales, which was slightly ahead of expectations, and a profit of $0.07 per share, right in line with estimates. The company's primary mine, Island Gold, saw its all-in sustaining costs (AISC) fall to $640 per ounce this quarter, while companywide AISC fell to just $849 per gold ounce.
This provides around a $375 per-ounce buffer based on the current spot price for gold. Although Richmont is heavily reliant on just one mine, investors can't argue with its exceptionally low-cost production.
First Majestic and Endeavour are spot silver casualties
Last, but certainly not least, First Majestic Silver and Endeavour Silver -- which reported its results a few days ago -- look to merely be casualties of silver's lengthy move lower over the past three weeks.
According to 2017 production estimates from Bank of Montreal, First Majestic Silver and Endeavour are the two mining companies most tied to silver production. First Majestic Silver is estimated to generate nearly 70% of its revenue from silver in 2017, with Endeavour around 60% of its revenue. By comparison, Silver Standard Resources will generate less than 20% of its revenue from silver in 2017.
With gold down around 5% over the past three weeks and silver down about 12%, it's no wonder that these silver-heavy miners have been hit hard. Nonetheless, both have done a good job of cutting costs and reducing their AISC to levels that should generate profits, even with silver hovering in the $16 per-ounce range.
Today's hiccup could be the perfect buying opportunity for any one of these six precious-metal mining stocks.