Gold stocks are (mostly) on fire. During Thursday's trading session, we witnessed the following intraday gains:
- El Dorado Gold (NYSE:EGO): up 14%
- Kinross Gold (NYSE:KGC): up 18%
- New Gold (NYSEMKT:NGD): up 10%
- Harmony Gold Mining (NYSE:HMY): up 12%
- Royal Gold (NASDAQ:RGLD): up 16%
Although none of these companies closed at their intraday highs, gains of 9% to 13% are a welcome sight for gold investors.
Gold looking lustrous, once again
What led the charge for the industry? Primarily, it was the rise in gold prices, which hit $1,155 per ounce in New York trading, a three-month high for the precious metal. Gold miners such as El Dorado, Kinross, New Gold, and Harmony, are reliant on steady-to-rising gold prices as one part of their formula for success.
Royal Gold, though, is a royalty interest company that works out long-term deals with miners, so it's often more directly tied to fluctuations in gold prices. With deals that allow it to secure gold well below market value -- think $400 to $500 per ounce -- in exchange for upfront cash to aid miners in the buildout or expansion of a mine, the nearly $100 per-ounce rally in gold prices since the year began has provided quite the ray of hope and boost for Royal Gold and its shareholders.
However, for the miners mentioned above, there's another component that must be looked at: all-in sustaining costs, or AISC. Even if gold prices are moving up, it won't make much of a difference if miners can't figure out a way to lower their costs to make production viable over the long run. For instance, El Dorado announced that it expects to take up to a $1.6 billion charge in Greece related to its Skouries mine. If miners don't work to reduce their costs, more writedowns could be necessary.
Unique situations drive share-price appreciation
Of course, each company up here has its own unique situation. African gold miners, which had for the longest time dealt with extraordinarily high labor costs and the threats of a strike, are some of the top performers of late. Part of this has to do with them losing the most during the commodity downturn, so they might seem like the most logical bet for a rebound. But we've also witnessed fundamental improvements that suggest a real turnaround may be at hand.
For example, Harmony Gold Mining announced its quarterly profit results yesterday, showcasing a 74 million rand profit compared to a loss of 523 million rand in the previous quarter. AISC dropped 7%, but in U.S. dollar term,s they fell 15%, to $950 an ounce. The fall in the South African rand, and the rise in the dollar, is creating a perfect scenario for expansive margins.
New Gold has demonstrated success, as well, but it hasn't relied on currency fluctuations to drive its results. Instead, New Gold has relied on copper and silver recovery to diversify its production, and it recently generated record gold production, which all helped to push its AISC lower to $809/oz. in 2015. In 2016, New Gold forecast AISCs of $830/oz. to $870/oz., which is well below where gold closed today.
In the case of Kinross, the move higher seems to be tied less with its operational improvements -- Kinross should be reporting its quarterly results in less than a week -- and more with macroeconomic events. As a diversified miner with operations in North America, among other regions, Kinross is, at least for now, tied at the hip to what the U.S. Federal Reserve has to say. A weaker dollar, and an extended period of low interest rates, makes gold, a non-interest-paying asset, a potentially attractive investment when market tensions are high, and investors remain jittery.
Not everyone joined the party
But alas, not everyone enjoyed the coming out party for gold miners today. Primero Mining (NYSE:PPP), which principally operates in Mexico and Canada, was just clobbered to the tune of 28% after announcing that a legal claim has been filed by Mexican tax authorities against its subsidiary, Primero Empresa Minera.
According to the press release, which came out after the closing bell on Wednesday, the tax authority in Mexico is seeking to nullify the Advanced Pricing Agreement (APA) issued in 2012 that governs what portion of Primero's proceeds are taxed. Primero Mining believes its APA should cover all silver mined between 2010 and 2014 without retroactive dispute; but based on today's nosedive, it's clear that Wall Street and investors are concerned.
What's next for gold stocks?
The important question is what's next for these gold stocks? As much as it's a dull answer, we should be watching three fundamental factors.
First, keep an eye on the price of gold. As moves gold, so move gold stocks -- for the most part. Higher gold prices often mean better margins, all things considered, and vice versa.
Secondly, closely monitor production costs and AISC for gold miners. Preferably, we want to see costs falling, and we would like AISC well below the $1,000/oz. mark. A miner like New Gold, which has a substantial buffer with its AISC relative to today's closing gold price, could be worth considering over the long run.
Finally, pay close attention to the U.S. and global macroeconomic outlook. Gold tends to perform well during times of uncertainty as a so-called "fear hedge," and it tends to perform well in low-interest-rate environments where it isn't forced to compete against juicy bond yields. With the U.S. looking to put off its rate hikes for some time, and Japan adopting negative interest rates last week, the outlook for a continued gold surge appears promising.