VanEck sees value in gold mining stocks

Mar 27th, 2017 | By | Category: Commodities

Gold mining equities are currently trading at highly attractive valuations and have the potential to close the gap on the price of gold, according to commentary from VanEck, the provider of the VanEck Vectors Gold Miners UCITS ETF (LON: GDX) and the VanEck Vectors Junior Gold Miners UCITS ETF (LON: GDXJ).

VanEck sees value in gold mining stocks

BofA Merrill Lynch analysts previously forecast a 51% increase in exploration spending by senior and mid-tier gold mining companies in 2017.

While the price of gold and the performance of gold stocks tend to exhibit relatively strong correlation, the two diverged in February with bullion rising 3.1% and the NYSE Arca Gold Miners Index and the MVIS Junior Gold Miners Index, underlying GDX and GDXJ respectively, declining 3.9% and 2.2%.

Joe Foster, Portfolio Manager and Gold Strategist at VanEck, commented: “The markets reacted surprisingly strongly to a series of rather disappointing annual results. Although most producers have met expectations, there have been a few negative surprises that have weighed on their stocks. Additionally, a couple of miners downgraded the quality of their reserves or lowered production forecasts, and a couple of others raised equity.”

With the price of gold rising, driven in part by geopolitical uncertainty since Brexit, and trading at above $1,200 per troy ounce, Foster believes mining companies have been encouraged to increase exploration spending.

Indeed, he notes that BofA Merrill Lynch forecasted North American senior and mid-tier companies to increase total exploration spending by 51% and new project capital by 32% in 2017. This will hit cash flow in the short term but, in Foster’s view, will pay off with discoveries and developments in the medium term.

While the underwhelming announcements from gold miners cast a negative tone over the fourth quarter earnings season, Foster believes they do not explain the significant underperformance of gold stocks relative to bullion. Unusual trading on the afternoon of 27 February further exaggerated the weakness in gold stocks. Gold trended lower beginning around noon that day as Robert Kaplan, President of the Dallas Federal Reserve, made comments supportive of a rate increase, which stimulated US dollar strength. Gold ended the day with a $4.4 (0.3%) loss, reflecting a normal fundamental reaction to the news.

Foster comments: “In the same afternoon gold stocks reacted as if gold had taken a $30 beating. Trading volumes hit a historic daily high. The unusual trading and lack of fundamental drivers suggest that technically driven funds received sell signals that induced further stop loss selling. What prompted such sell signals is a mystery, but it has resulted in making stock valuations that were already attractive, dirt cheap. Miners will try to turn that dirt into gold.”

The performance of gold stocks remains strong overall despite February’s declines. Year-to-date performance of the NYSE Arca Gold Miners Index stands at 10.7% and that of the MVIS Junior Gold Miners Index 17.3% (as of 21 March 2016).

Foster concludes: “The decline in February offers compelling buying opportunities in gold mining companies which should benefit from the high valuation of the metal and see a return in the medium-to-long term on their investments into exploration and new projects.”

GDX and GDXJ provide exposure to globally-listed gold mining firms.

GDX tracks the large cap segment of the market by investing only in companies with a market capitalization of more than $750 million. It has $113m in assets under management (AUM) and a total expense ratio (TER) of 0.53%.

The ETF has 52 current constituents with significant country exposure to Canada (54.8%), the US (16.2%), and Australia (15.0%). The largest single holdings are Barrick Gold (11.5%), Newmont Mining (9.7%), Goldcorp (7.3%), Newcrest Mining (6.9%) and Franco-Nevada (6.1%).

In contrast, GDXJ tracks smaller gold miners who are typically in the development and exploration stage and therefore likely to be riskier than more established firms with existing reserves already in the extraction phase. It has $63m in AUM and a TER of 0.55%.

With 49 constituents, the largest country exposure is to Canada (71.3%) followed by Australia (14.5%) and the US (6.7%). The largest single holdings are Alamos Gold (6.1%), Iamgold (5.7%), Pretium Resources (4.3%) and Regis Resources (4.3%).

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