I don't know what else to call it; it's full-on goldageddon out there for the gold mining stocks!
Gold prices just crashed through technical support that had defined recent range-bound trading, and diminished demand from China associated with the ongoing Lunar New Year holiday may have contributed to the fall. Keeping things in perspective, however, I remind investors that the entirety of gold's ongoing consolidation since the September 2011 high near $1,900 per ounce remains a fairly moderate pullback of 15%. The real goldageddon is not in the physical market, then, but rather in the shares of the companies that mine it.
I must concede to some surprise at the depth of Friday's declines among the miners of gold, since I had viewed the heavily impaired asset valuations already reflected throughout the industry as suggestive of limited downside risk. Some combination of triggered sell stops and outright capitulation may be driving this latest dive; though, admittedly, that is an entirely speculative assessment on my part.
The Market Vectors Gold Miners Index ETF (NYSEMKT:GDX) retreated by nearly 3.5% Friday morning, moving uncomfortably close to a multi-year low recorded last May. Following negative comments from Bank of America concerning Gold Fields' (NYSE:GFI) recent restructuring, that stock plunged by more than 7% Friday to record a fresh 52-week low. Sandstorm Gold (NYSEMKT:SAND) picked a most unfortunate day to announce a $55 million financing package with Entrée Gold, which includes a $40 million metal credit purchase agreement covering future production from Entrée's interest in an extension of the world-class Oyu Tolgoi mine operated by global behemoth Rio Tinto (NYSE:RIO). Sandstorm's shares were clobbered by nearly 10% Friday morning.
I don't consider either of the above-cited sell-offs warranted under the circumstances, but just as difficult to square with underlying fundamentals is the market's failure to reward Goldcorp (NYSE:GG) for delivering an exceptional quarter with its year-end earnings (released Thursday after the close). Because Goldcorp is the "master-crafter of deals," this miner was busy enhancing the value of acquired assets over the course of 2012 rather than booking massive writedowns as rival Barrick Gold was forced to do. Following an enormously successful exploration campaign at Cerro Negro -- where first production is expected by the end of this year -- Goldcorp has now expanded proven and probable reserves at the project by 177% (to 5.7 million ounces) since acquiring the asset near the end of 2010. In an industry where true value generation has been sorely lacking, Goldcorp continues to break the mold.
Net of 2012 production, Goldcorp grew proven and probable reserves by 4% to 67.1 million ounces. Toss in "one of the largest silver reserves in the industry" at 1.2 billion ounces of silver, and Goldcorp's gold-equivalent reserve base leaps to 88.9 million GEOs (converting silver at 55:1).
Goldcorp has healed swiftly from prior challenges at Red Lake, and enjoyed a strong contribution from Penasquito under the circumstances. Goldcorp's adjusted earnings of $465 million ($0.57 per share) beat analyst estimates by $0.03, and operating cash flow remained quite healthy at $721 million. Even in the midst of a prolonged cyclical bear market for gold stocks that now seems to be devolving into some form of goldageddon event, the investment case for Goldcorp continues to grow stronger as the share price declines.