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After getting slaughtered last year, gold mining stocks are showing modest gains in 2014 and are also outperforming gold by a narrow margin. That’s the good news. The bad news? Gold miners are still burning through cash, making them unattractive investments.
“Understandably, many shareholders are toiling with the idea of buying into gold equities given the past 12-month’s decline in share prices,” said Johann Steyn, an analyst at Citigroup, in a note. “We continue our theme of ‘don’t be tempted.’”
But rather than condemning all gold miners, Mr. Steyn holds out some hope for a select few that show more promise than their peers. These rare opportunities include Goldcorp Inc. and Barrick Gold Corp.
His negative assessment of gold miners in general comes at a time when the sector has been bloodied beyond recognition. When the price of gold fell 29 per cent in 2013, the NYSE Arca Gold Bugs index of 18 global producers plunged nearly 55 per cent, approaching 10-year lows.
According to Mr. Steyn, the decline didn’t merely reflect the skittishness of investors but rather the “intrinsically bad fundamentals” of the industry – which is probably why he subtitled his report “A Leopard Cannot Change Its Spots.”
Gold itself isn’t the threat here. Indeed, he argues that the price of gold should average $1,337 (U.S.) an ounce in the second half of the year, marking an improvement from the current price of $1,256 an ounce, due in part to geopolitical risks and demand from China. He expects gold to rise modestly again to $1,365 an ounce in 2015 – down from the high of $1,900 an ounce in 2011, but at least stable.
Nor are companies spending freely these days. The top 10 producers have cut capital expenditures by 25 per cent, exploration expenditures by 33 per cent and corporate expenditures by 8 per cent.
But rather than leaving gold miners looking leaner and meaner and worthy of investor attention in the event of an upturn in the gold price, Mr. Steyn estimates that 75 per cent of the industry is still burning through cash – and additional cost-cutting is going to be hard to do without closing mines.
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