Not All Gold Miners Should Be Buried

04/19/2012 9:25 am EST

Focus: ETFs

While investors have grown disgusted with the underperformance of gold miners, the companies have grown more efficient and profitable, says Robert Sinn, and there may be no better time to buy high-quality mining stocks.

I have been discussing and blogging about the dramatic underperformance of the gold miners, as tracked by ETFs like the Market Vectors Gold Miners ETF (GDX) and Market Vectors Junior Gold Miners ETF (GDXJ), relative to gold itself for the last 18 months.

Here are daily charts for both ETFs:

chart
Click to Enlarge

chart
Click to Enlarge

Rick Rule of Casey Research has offered an essential read which expertly summarizes what has transpired over the last decade and where the sector is currently positioned, but before you read the entire piece, here are a few choice excerpts:

“Gold equities were punished, both absolutely and relative to bullion, by their relative corporate underperformance. Many analysts, myself prominently among them, were dismayed at the gold mining industry’s abysmal corporate performance during the last decade.

The industry’s operating cash generation in the face of a gold price escalation from $260 per ounce to over $1,200 per ounce was inexplicably poor. The companies’ continued equity issuances in the face of these increases in the gold price meant that existing holders were continually diluted, even as their earnings expectations were always disappointed. Investor fatigue—in fact, investor disgust—was the natural and healthy response to this performance.

Now, even though equities prices continue to decline, corporate performance is increasing, and increasing dramatically. A cursory look at producers’ income statements tells a dramatic story: earnings and cash generation, on a per share basis, are rising in dramatic fashion.

Capital expenditures are increasingly funded with internally generated cash rather than equity issuances or debt. In fact, even in the face of the gold equities decline, many gold producers are generating cash so fast that even after funding hefty capital budgets, they are able to return cash to shareholders in the form of stock buybacks and increased dividends.

The markets are a lot less expensive than they were, and this can only be good news for buyers. Markets work, as we have said. Expensive markets collapse of their own weight, cheap markets rise as greed overwhelms fear. But I believe even better news is at hand for the intelligent and discerning investor and speculator.

All gold equities have gone down, ‘the good, the bad, and the ugly.’ But there is no requirement that readers confine their purchases to the bad and the ugly!”

See also: A Gold Trade Contrarians Will Love

By Robert Sinn, trader and blogger, RobertSinn.com

Even if you aren’t an investor in gold or gold mining shares, do yourself a favor and read the entire piece: “Rick Rule: Why I’m Excited About This Market”

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