Underperforming Gold Stocks Leave Many Puzzled

Gold stocks have been underperforming gold itself for some time now, and that's got a lot of people perplexed - including some of those companies' CEOs.

Amazed at what has transpired, the producers are scrambling to generate any sort of interest in their stocks. “We are seeing ever increasing inclusion of ounces into mine plans where the degree of confidence associated with their location and existence is lower than previous consideration,” [CIBC World Markets analyst Barry] Cooper noted. “In many cases, the mine plans are now incorporating ounces that have not even made it to an inferred category let alone the usual required measured and indicated classification.”

For that reason, Mr. Cooper worries that net asset value could become less useful as a valuation metric, because no one can really trust the number.

Mr. Cooper himself believes that the stocks will eventually bounce back because the metrics he uses definitely say they're cheap.


It is an odd state of affairs. Gold stocks did much better than gold itself in the early stages of gold's bull market: from 2001 to 2007. Needless to say, the crisis of '08 wrecked the gold stocks, pushing them down much farther than gold itself. Since then, there have been times when the producers have outperformed gold but there have also been times, like now, when they've underperformed.

Since the '08 crisis, junior exploration issues with real deposits have done much better than the majors, although the mini-mania came to an end late last fall.

Gold Stocks Could Be Ready For A Bouce: Steve Sjuggerud

After pointing out that gold stocks have underperformed gold itself, Dr. Steve Sjuggerud bases his bullish forecast on the Gold Miners Bullish Percent Index (BPGDM) oscillator. Although it's still falling, and is not yet in oversold territory, it's approaching levels at which both it and the Market Vectors Gold Miners ETF have bounced upwards.

Here's the graph:



In Dr. Sjuggerud's article, this graph correlates the BPGDM with the ETF itself:



He concludes that it would be wise to stock up on cash so as to take advantage of the opportunity.


If so, then the oscillator itself has better be kept an eye on so as to determine a good selling point unless it's being used as just a timing device for a long-term investor's entry point. In the latter case, the fundamental values of the underlying companies should be used as the basis of whether or not to invest at all. Although the gold-mining sector has a P/E lower than that of the general market, what matters for cyclicals is where earnings are going to go. A gold mania would be the best earnings-booster - while it lasts - because gold, and revenues, would handily outpace costs.

Brent Cook Cautious About Junior Exploration Stocks

After noting that a mini-bubble for both gold and silver has popped, Brent Cook notes that gold producers have underperformced gold itself since 2006.

Specifically, the gold price has gained 193% versus the Gold Equity Index's 75% gain. This data point validates the complaint of many funds that, despite getting the macro picture right (gold) they missed out on the leveraged gains they expected from the mining equities.

With regards to the index itself, it is comprised of a number of "troubled" companies. These troubles stem from permitting, geopolitical issues and just plain cost overruns and bad luck. These are inherent and inevitable in the mining industry—so much so that a sizeable portion of the money that might have gone into the sector in the good old days now ends up in Exchange Traded Funds (~67 million ounces of gold is held by ETFs).

He goes on to say that excitement over finding gold has spilled over into exploration companies with no revenues and iffy prospects having market caps in the hundreds of million of dollars. Companies are finding it very easy to raise capital on the private-placement, even those with dubious properties. He recommends caution with respect to the juniors, suggesting they'll sink a fair bit as the excitement fades.


From what I can tell, there has been a fade in the junior explorers. As is often the case, an underground sector tends to tank when it reaches mainstream attention.

Majors' Dividend Policies Showing More Confidence In Earnings

Over at Seeking Alpha, Tim Wood doesn`t mention that reason for a change in dividend policy but he does call attention to the change itself. He discusses the dividend policies of several majors, and says that Eldorado`s new policy is a fair one for shareholders.

Eldorado Gold (EGO) was the last dividend hold out among senior gold producers. It has now bowed to market pressure and offered shareholders $0.05 per share

Notably, Eldorado has taken a lead in expressing its dividend in terms of a gold equivalency insofar as the payout will amount to approximately $100 per ounce of gold sold by the company in the second half of 2010. If the company holds that policy, investors could be paid nearly $75 million this year which would be almost three times what is currently being offered.

Kudos. It is high time that one of the companies did this, and it should become a benchmark for the industry to commit to pay a percentage of their operating margins as dividends.

This avoids trapping the company in an unsustainable dividend ratio, but holds it to share any bonanza with investors. This would also have the benefit of improving the gearing of gold stocks to bullion prices. Yes, it may make them more volatile, but that is hardly something most gold equity investors fear.

If all the senior gold companies adopted a dividend equivalent to $100 per ounce of gold produced, investors would enjoy a 125% increase in payouts to around $3.5 billion per year.

Of all of them, only Goldcorp exceeds this level. Confidence in future earnings is increasing amongst the majors, but not to that level yet.

Laurence Roulston Says Now Is Good Time To Buy Gold Stocks

In a wide-ranging interview, covering several advanced-stage exploration companies, Lawrence Roulston says that now is a good time to buy gold stocks because of the recent correction.

There is tremendous upside in the gold market. If an investor is hoping to profit by day trading bullion or gold stocks I m not really the person to help in that regard. I believe there is enormous strength in the market for investors who are looking at the bigger long term picture. The paper currencies in the world are on a downward path. There has been evidence of that for a decade and there is evidence that it is most likely going to continue. For example investors in Europe are becoming nervous about the euro and they re turning to gold. I believe that trend was a major component in the increase of the gold price last year. I believe that trend will continue over the long term as concerns about the euro and other currencies spread to other parts of the world. Gold is becoming more important now as a hard asset to protect value in the long term.

As for exploration companies, he prefers what he calls "a new play in an old camp." He also has a fondness for prospect generators. An example of a new play would be Millrock Resources, which he says has a team with lots of experience in Alaska. Millrock is also a prospect generator, which has inked a deal with Brixton Minerals for its Cristo gold project in that same Alaska.

Roulston also highlights Sandspring Resources, which has a 6 million oz deposit in Guyana. He believes it's undervalued relative to its peers because of exaggerated perceptions of political risk. Although there were expropriation of the aluminum industry in the 1980s and '90s, Raulston believes that any further expropriations won't happen. The new Prime Minister, Sam Hinds, worked for a mining company at the start of his career.

Survey Of Canadian Investment Advisors Shows Flagging Confidence In Gold Stocks

The Q1 survey of Canadian investment advisors shows steadiness in overall bullishness, and a large increase in hopes for the Canadian financials, but gold has fallen drastically out of favour:

The lone equity sector that was the exception to this trend was the S&P/TSX Global Gold Index™, which saw a stark reversal of sentiment. Bullish sentiment dropped from 64% in the Q4 survey to 33% in the Q1 Survey, despite the fact that gold stocks delivered returns of more than 25% on the year. Similarly, bullish sentiment on gold bullion dropped from 66% in the Q4 survey to 35% in the Q1 Survey.

"For the last two years, advisors have been consistently bullish on the prospects for gold, coinciding with phenomenal returns for the asset class. This survey seems to suggest that most Canadian investment advisors feel that gold has had its run and may now be fairly- or even over-valued," Mr. Atkinson said.

The overvaluation explanation is a little odd, because major unhedged gold miners haven't outperformed gold itself since early December and haven't outperformed much this year. A one-year ratio chart of the Amex Gold BUGS Index versus bullion shows it:



The line moves up when the unhedged majors outperform, and vice-versa for bullion. It's evident that, despite much better earnings, the majors haven't fared all that well comparatively. Maybe the advisors surveyed got tired of waiting for the oft-talked-about leverage to show up.