The shares of precious-metals miner Golden Star Resources (GSS) rallied 13% by roughly 3 p.m. EDT on July 29. The advance was slow and steady through the day. However, it would be hard to discuss this move without looking back over the last couple of months. The stock is up an incredible 70% or so over the trailing three month span. There are two intertwined stories here.
Gold, the primary metal that Golden Star produces, has advanced sharply since hitting a low in mid-March. The rise has accelerated in recent days. That has led investors to bid up the shares of miners, which are generally leveraged to price increases in gold. The expectation is that rising gold prices will lead to rising earnings.
Earnings are exactly what Golden Star reported after the close on July 28, and investors were not let down. Production increased 4.5% year over year in the quarter, with improving ore grades in a key mine. All-in sustaining costs, a measure of how much it costs to pull an ounce of gold out of the ground while also maintaining the company's assets, dropped 3%. The average realized gold price the company achieved rose a huge 28% year over year in the quarter. And adjusted EBITDA was up a huge 283%, with earnings going from a loss of $0.05 per share in the second quarter of 2019 to a profit of $0.09 in 2020. Investors clearly showed their approval today.
Investors looking at the huge stock advance in Golden Star over the last few months should keep in mind how important the price of gold is to the company's financial performance. This was on display in second-quarter earnings. Yes, things are great right now, but if gold prices were to fall, Golden Star shares would fall along with it. After such a big run, investors should probably tread with caution here over, perhaps unrealistic, exuberance.