Everyone knows that this has been a devastating bear market for the gold mining
sector. If you have followed our work you know that it is the second worst
cyclical bear market in at least 80 years. Obviously, gold mining stocks have
been crushed. Then they became cheaper, then cheaper and then really cheap.
Yet, we may not realize just how cheap this sector has become both in nominal
and relative terms.
Below we plot the Barron's Gold Mining Index (BGMI) against Gold. The BGMI
dates back to 1938. The ratio recently touched its lowest level in at least
77 years! There might not be anyone alive today who has seen gold stocks this
cheap relative to Gold.
The next chart plots the price to cash flow valuation for senior gold miners.
Twice in the past two years it touched a low of about 5. According
to data from BMO, this is even lower than during the secular bottom of
2000 when senior miners traded at 6x-7x cash flow.
Gold stocks are also historically cheap relative to book value. A year or
so ago I posted a chart from Datastream, a product of Thomson Reuters that
showed gold stocks trading at their lowest book value since at least 1980. You
can view that here. Here is another
chart which shows the price to book ratio for the 10 largest miners. It
is unsourced but shows price to book value at the lowest levels since at least
1993.
These spectacularly low valuations have resulted from arguably the second
worst bear market ever. The updated bear analog chart is below.
Could gold mining stocks get even cheaper in the weeks or months ahead? It
is certainly possible, but only in the scenario of Gold trading to new lows.
Even in that scenario, there is no guarantee that the various gold miner indices
will make new lows.
While we lack data that precedes 1980, my guess is gold mining stocks relative
to cash flow and book value are trading at valuations not seen since 1960 (a
secular bottom) or even earlier. In the year 2000 the gold stocks were at the
end of their worst cyclical bear market in history (and worst secular bear)
and were trading at a 24-year low! Valuations recently surpassed (to the downside)
where they were at that epic low.
In any event, the gold mining sector is primed for what should be a spectacular
recovery. A big rise in margins/earnings and valuations is the one two punch
that causes markets to rally substantially following a major bottom. Margins
are starting to recover as evidenced by Newmont Mining's earnings report. Miners
have worked to cut costs and are now getting a boost from lower energy prices
and weak local currencies. The only thing left is for metals prices to turnaround.
