What happened
Most gold stocks delivered impressive gains today after gold prices hit 10-month highs. The run-up in precious-metals prices comes on the heels of multiple news items, most notably a report from the World Trade Organization showing an important indicator of global trade in goods hit a nearly 10-year low. When the economy slows down -- or is at risk of doing so -- investors tend to seek out more exposure to gold.
A handful of gold stocks were soaring by double digits today. Shares of Pretium Resources (PVG +0.00%) paced the peer group with intra-day gains as high as 13.1%. That was followed by an increase of as much as 11% in shares of AngloGold Ashanti (AU +0.00%), helped by strong full-year 2018 earnings reported earlier in the day, and more than a 10% rise in Sibanye-Stillwater (SBGL 2.98%) stock.
Shares of each company settled at double-digit gains at market close.
Image source: Getty Images.
So what
Surging optimism in the near-term outlook for gold prices is providing the largest benefit to struggling producers. Both AngloGold Ashanti and Sibanye-Stillwater have been weighed down by political uncertainty and inefficient operations in South Africa, where much of their production is based. Labor strikes and numerous headlines calling attention to miner deaths in the country have not been kind to the businesses in the past year, as some customers have hinted they may reduce purchases linked to the companies if they don't take action. As a result, both companies are taking steps to control the factors within their sphere of influence.
AngloGold Ashanti reported full-year 2018 free cash flow of $67 million, up from just $1 million in 2017. Excluding the impact from restructuring charges, free cash flow settled at $140 million. While all-in sustaining costs (AISC) fell to $968 per ounce last year from over $1,000 per ounce in 2017, that's still significantly higher than most major producers. Rising gold prices might help the company accelerate its turnaround, invest in new technology to improve worker safety, make it easier to sell certain assets, and cut costs even more quickly.
Meanwhile, just last week Sibanye-Stillwater announced that it would cut 6,000 jobs in a major restructuring of its gold mining operations. The headcount reductions are aimed at boosting operating efficiency and improving miner safety, although the plan is running up against labor unions and the national government, which are concerned with rising unemployment. Either way, rising gold prices would make the financial benefit from job cuts go even further.
Image source: Getty Images.
Pretium Resources is based in Canada, but investors approached the business with cautious optimism in 2018 as it ramped up output from its sole asset. Full-year 2018 earnings demonstrate that the Bluejack mine in Northern Canada delivered on its promise to significantly reduce operating costs per ounce of gold, allow the business to finally achieve profits, and generate impressive cash flow going forward.
The gold miner reported $454 million in revenue last year, a 155% increase from the year-ago period. Operating income jumped from just $52.8 million to $150.6 million in that span, while AISC dropped 11% to $764 per ounce. Management expects even bigger improvements in the year ahead, according to the discussion of results and guidance on the company's full-year 2018 earnings conference call.
Check out all our earnings call transcripts.
While lower-grade ore will be mined in 2019 compared with last year, Pretium Resources expects AISC to settle near $825 per ounce this year. That's relatively healthy and will allow profits and cash flow to remain strong if gold production increases by the expected 8% compared with 2018. The business needs Bluejack to continue delivering strong operations, especially if it's going to reduce its relatively high debt burden. Higher gold prices will help to de-risk those efforts.
Now what
The interesting thing is that gold stocks are generally not very good investments over long periods. Few ever succeed in beating the return of the S&P 500. Case in point: Pretium Resources has a five-year return of only 15.7%, while AngloGold Ashanti and Sibanye-Stillwater have lost 15% and 36%, respectively, in that time. The S&P 500 has delivered a cool 51% gain in the past half-decade -- and that's without including dividends. Simply put, while some investors increase their exposure to gold when clouds gather over the global economy, the data show that's not a great strategy for building wealth. These stocks may be better buys.
