At the beginning of May, gold traded hands at over $1,300 per ounce. By the middle of August, selling prices had slipped more than 10%, which is a relatively sharp decline for the sought-after precious metal. That helped to nudge many gold stocks lower this summer, but there were also company-specific sources of news that played a role and accelerated stock losses after the announcement of quarterly earnings at the end of July.
With that in mind, what should investors make of the double-digit declines from Goldcorp (GG) and Royal Gold (RGLD 0.88%) since the beginning of May? Similarly, given the growth prospects of Franco-Nevada Corp (FNV -0.32%), does its 6% drop represent a buying opportunity?
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Analysts didn't like Goldcorp's first half
There are a number of moving parts at Goldcorp right now as the company executes an ambitious five-year plan that aims to increase production 20%, reduce all-in sustaining costs (AISC) 20%, and grow reserves 20% by 2021. That would see annual production rise from 2.5 million ounces last year to 3 million ounces at the finish line, while AISC would drop from $825 per ounce to $700 per ounce in that span.
Analysts are openly pondering whether operations are on the right track. Goldcorp expects gold production this year to match levels from 2017, while AISC drops to $800 per ounce. But in the first half of 2018, the business reported AISC of $830 per ounce and production that was 10% lower than levels achieved in the first six months of last year.
However, management says not to worry. Goldcorp will ramp up production at two mines (Eleonore and Cerro Negro) in the second half of 2018, which will allow full-year production and cost targets to be met. Meanwhile, important expansion projects are ahead of schedule (Penasquito Pyrite Leach), below budget (and Musselwhite), and exploring the use of new technology (Borden). Throw in the recent completion of an efficiency program that reduced annual expenses by $250 million -- and a stretch goal of reducing annual expenses $100 million more -- and recent events shouldn't alter anyone's investment thesis.
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Even streaming companies can't escape this risk
Royal Gold is a leading gold streaming company, which means it forgoes shovels and hard hats for air-conditioning and computer screens by simply purchasing production from a bevy of existing gold and silver mines and selling it into the market. The inherently high-margin and lower-risk business model allows gold streaming stocks to match or beat the long-term return of the S&P 500 -- something most gold miners cannot say.
But in July, investors received a blunt reminder that even this unique business model isn't completely immune to the risks of mining. Royal Gold reported that water shortages have reduced production volumes at the Mount Milligan gold mine owned by Centerra Gold, while the Rainy River gold and silver mine owned by New Gold had encountered a slower-than-expected ramp. These two mines represented 46% of the net value of production-stage interests owned by the streaming company.
Although the unexpected delays aren't ideal, they won't threaten the long-term prospects of Royal Gold. The company will still receive its allotted amount of production of gold, silver, and copper -- it'll just take a few more months or quarters than expected to reach maximum purchase volumes. Considering gold streaming stocks trade at stiff premiums owing to their high-margin, (generally) low-risk business models, they're also an easy target when plans get disrupted. That said, the streaming company is much better off than the miners encountering the delays. So long as the Mount Milligan and Rainy River mines come on line eventually, not much has changed for investors with a long-term mindset.
A gold stock, but vying to be more
Franco-Nevada is also a gold streaming company, but there's a twist: The company has extended its business model into energy production assets. Adding some diversification to a top and bottom line dependent on precious metals markets is an interesting idea -- and one that seems to have earned the benefit of the doubt from Wall Street. The stock has been one of the better performers in the gold industry this summer, down just over 6%.
The diversification effort is still in the early goings, with just 13% of revenue in the first half of 2018 sourced from oil and gas streams. But second-quarter 2018 oil and gas revenue grew to $22.7 million, up 136% from the year-ago period. The company even increased its full-year 2018 energy revenue expectation from a midpoint of $55 million to a midpoint of $70 million. That will continue to grow.
In August, Franco-Nevada announced a more than 30-year agreement with Continental Resources that should deliver $30 million to $35 million in revenue per year within the next decade. While it won't kick in until 2019, it gave management the confidence to expect oil and gas revenue of around $130 million per year in 2022. Throw in healthy and growing streaming agreements for precious metals, including increasingly valuable platinum and palladium, and this gold stock should continue to build on its five-year total return of 52%.
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Gold prices are down, but these stocks should recover
After remaining above $1,300 per ounce for a record amount of time, gold prices cooled off a bit this summer. That dragged down many gold mining and gold streaming stocks, which was only made worse by unrelated announcements that coincided with quarterly earnings. However, investors that take a long-term view may find that nothing has really changed for these three gold stocks. Goldcorp says it remains on track with its plans to reduce operating expenses and boost production. Royal Gold will recover from temporary delays at two important growth projects. And Franco-Nevada -- well, it hasn't really reported any bad news lately. All three companies may be worth a closer look for investors interested in the industry.
