Stop me if you've heard this one before: gold stocks are soaring.
Here's just a snippet of what investors bore witness to today:
- Coeur Mining (NYSE:CDE): up as much as 14%
- New Gold (NYSEMKT:NGD): up as much as 10%
- Kinross Gold (NYSE:KGC): up as much as 12%
- Yamana Gold (NYSE:AUY): up as much as 10%
- B2Gold (NYSEMKT:BTG): up as much as 10%
Rallying gold stocks have become somewhat of a regular occurrence in 2016, with the underlying price of gold rising by roughly $170 per ounce, year-to-date. As of the 4pm ET close of the U.S. stock market, gold prices were up more than $26/oz. to $1,235. As a reminder, gold prices hit their highest levels since January 2015 last week at $1,263/oz. on an intraday basis.
Rising gold prices certainly dictate why gold miners are up, but they don't tell us why gold itself is up.
That answer can be found in four major catalysts.
Four catalysts driving gold stocks higher
First, gold tends to feed off of uncertainty, and we're dealing with high levels of uncertainty around the globe. Plummeting commodity prices have completely sapped growth prospects in Russia, China's annual growth hit a 25-year low in 2015 (which in turn weakened demand for certain commodities), and U.S. GDP grew by a paltry 0.7% during the consumer-friendly fourth quarter. The more skittish investors feel, the more likely they are to flock to gold as a safe-haven investment.
Secondly, we're seeing opportunity costs drop. What do I mean by opportunity costs? When the U.S. economy is running on all cylinders it's normal to see interest rates rising. Rising rates have a tendency to push bond and CD yields up, which attracts income-seeking investors. Lately, though, U.S. Treasury yields have been falling, meaning investors aren't giving up much in terms of income potential when considering the purchase of physical gold, which doesn't pay a dividend.
Third, supply and demand still play an important role in gold prices. According to data from the World Gold Council in the fourth-quarter of 2015, gold demand increased 4% on year-over-year basis. Central bank demand and investment demand both rose during Q4 2015, while jewelry- and technology-based demand dipped slightly. If demand for a product increases, it's not uncommon to see the underlying price of that product move higher.
Finally, we're witnessing a genuine fundamental improvement in the vast majority of mining companies. Mining costs have been falling, production is increasing, and margins are expanding, which is often a good formula for success.
Improvement is everywhere
There's a reason the five names above were soaring by a double-digit percentage at one point today: fundamental improvements. Here are some examples of how these aforementioned mining companies have stepped up their game.
- Coeur Mining: Coeur is actually a silver and gold miner, so it's been benefiting from improvements in the underlying price of both metals. During 2015, Coeur Mining reported a 22% decline in all-in sustaining costs (AISC) for silver, and a 19% drop in gold AISC. AISC is as transparent a measure of total costs miners can offer investors. Coeur's 2016 guidance also called for comparable costs and capital expenditures relative to its 2015 results.
- New Gold: New Gold, which primarily operates mines in North America and Australia, demonstrated solid progress in its Q4 report, released yesterday after the closing bell. Full-year production exceeded guidance at 435,718 oz., and AISC came in at $809, which is more than $400 below the current price per ounce of gold (implying substantial margin expansion could be on the horizon). Utilizing its silver and copper byproduct to help offset its mining costs, New Gold could attract the attention of value investors.
- Kinross Gold: Kinross, which reported its results last week, may have disappointed investors a bit with its year-over-year decline in gold production and static AISC, but the company's 2016 guidance demonstrates just how big a step it's taken. Kinross expects production to rise by around 200,000 oz. at the midpoint, with AISC at the midpoint falling by about $35/oz. As long as Kinross can keep its costs moving in the right direction, its latest move higher could have legs.
- Yamana Gold: Similar to Kinross, Yamana's releasae of its preliminary 2015 production figures didn't wow Wall Street. However, Yamana's byproduct production of silver and copper, along with its cost-cutting initiatives, allowed it to report an unaudited AISC of just $760/oz. The shining star continues to be its Chapada mine where copper production is actually resulting in negative gold cash mining costs. Even though silver production is expected to drop by almost 2 million oz. in 2016, Yamana's low-cost operations give shareholders plenty of hope.
- B2Gold: Lastly, B2Gold, which has mining operations in Africa, Asia, and Central America, reported substantive fundamental improvements in January. Fourth-quarter gold production jumped 18% to 131,469/oz. from the previous year, and the company's 2016 full-year guidance calls for AISC to drop to a range of $895/oz. to $925/oz.
There are a lot catalysts working in favor of gold miners at the moment, but they'll need these drivers to continue to have any chance at a sustainable rally. As gold prices fell over the past five years, many miners wrote down the value of certain assets and pulled a number of cost levers. With many of those cost cuts now factored in, it's now up to increased production and rising gold prices to take care of the rest.
Although there are still inherent risks with gold mining stocks, savvy investors might want to consider giving this sector, and perhaps some of these aforementioned miners, a closer look.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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