The Gap in Gold
02/14/2014 11:00 am EST
Soon, the gap between gold mining companies that are close to reaching a bottom and those that aren't yet will be of significant distance, writes MoneyShow's Jim Jubak, who thinks that's why it's important to make sure the right one is in your portfolio.
There's still another week to go before investors have seen the last earnings reports from the global gold majors—Newmont Mining (NEM), one of the biggest gold producers doesn't report until February 20, for example—but it's already clear that this quarter's results will put major distance between miners that are closing in on a bad news bottom, and those that look like they've got another quarter or two before they face up to the full dimensions of bad news in their sector.
Once the reports are in, I'd suggest taking a hard look at portfolios of gold mining stocks, with an eye toward adding to names that look like they've aggressively reported bad news, and subtracting names of companies that still have another shoe or two to drop.
Goldcorp will get a hard look then, after the company reported very disappointing fourth quarter results yesterday, February 13.
Goldcorp's earnings for the period were really ugly. The company reported earnings per share of 9 cents a share, 14 cents a share below the Wall Street consensus, and a huge drop from earnings of 62 cents a share in the fourth quarter of 2012. (And that's excluding big write-downs on mines and mine projects. Including those items—and a tax charge in Mexico—Goldcorp showed a net loss for the quarter of $1.1 billion or $1.34 a share.) Revenue dropped 16.2% from the fourth quarter of 2012. Gold production did hit a new record of 768,900 ounces, up from 700,400 ounces in the fourth quarter of 2012.
But I expected this kind of earnings and revenue ugliness. And so did the market, apparently, since the stock climbed 3.61% yesterday.
What was disappointing, however, is the company's very tentative move to reduce its assumed price of gold and the, therefore, very limited reductions in proven and probable reserves. Goldcorp set itself—and investors—up for more reduction in reserves later in 2014. In other words, I don't think all the shoes have dropped yet.
Goldcorp did cut the price that it uses in calculating reserves to $1300 an ounce, from $1350 an ounce at the end of 2012. (Reserves fall with the assumed price of gold since, at a lower price, some deposits won't be worth mining.) That, plus depletion from mining, dropped gold reserves to 54 million ounces, a 15% year over year decline. (Proven and probable silver reserves came to 818 million ounces.)
At $1300 an ounce, Goldcorp's assumed price of gold is still significantly above the $1140 at Barrick Gold (ABX) or the $1,200 an ounce at Kinross Gold (KGC). I expect that Yamana Gold AUY, set to report on February 18, which already used a price assumption below $1300 an ounce, will reduce its price assumption even further. That leaves plenty of room for another reduction in reserves at Goldcorp on a lower assumed price. Gold closed at $1273 an ounce on average in the fourth quarter of 2013, 4% lower than in the third quarter and 26% less than in the fourth quarter of 2012.
Not everything is bleak at Goldcorp. The company did make progress at reducing costs in the quarter and forecast more cost reductions in 2014. In 2013, all-in sustaining costs fell to $1031 an ounce. For 2014, Goldcorp forecast a drop to between $950 and $1000 an ounce. Production will increase by as much as 18% in 2014.
Falling costs and rising production is good for Goldcorp and its investors at some point. But given the very moderate rate at which Goldcorp is reducing its price assumptions—and cutting reserve estimates—that point may be further away than I'd like and further away than it is at other gold mining companies.
With gold mining shares, as measured by the S&P Global Gold Sector Index, up 24% in 2014 (versus an 8% gain on the price of gold itself), this looks like a good time to make sure that the gold mining stocks you own are the best ones to own going forward.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Goldcorp or Yamana Gold as of the end of December. For a full list of the stocks in the fund see the fund's portfolio here.