Recent Price Fall- What to Blame?
This year, gold prices have been under pressure due to continued recovery in the US economy and expectation of interest rate rise in the U.S. Moreover, with Greece reaching a bailout agreement and the jitters surrounding the country’s departure from the Eurozone being over, the safe haven demand for the metal has diminished. Thereafter, China dealt a hard-hitting blow to the bullion market with its shocking revelation of its official gold holdings on Jul 17. China’s gold reserves stood at 1,658 tons at the end of Jun 2015, a 57% addition over gold holdings of 1,054 tons in Apr 2009. Even though China is now the fifth largest holder of gold, the numbers were almost half of market expectations.
This triggered heavy selling in Asian markets and sent gold prices nose-diving to $1,080 an ounce on Jul 20, the lowest since Mar 2010. This led shares of big gold producers plummeting, wiping billion of dollars from their market value. Among big cap miners, Barrick Gold Corporation (ABX) lost 15% of its value overnight. Shares of Newmont Mining Corporation (NEM), Goldcorp Inc. (GG) and Kinross Gold Corporation (KGC) were also down over 12%.
Performance in the Second Quarter
As per the Zacks classification, the gold-mining industry comes under the broader Basic Materials sector. Only 14.3% of the stocks in the sector have reported their results, putting up an earnings growth of 25.6% on the scoreboard.
It is too early to be upbeat about the results, as considering the companies that are yet to report, earnings of the sector is expected to go down 1.1% in the second quarter. The earnings graph is likely to take a nosedive with a 12.2% plunge in the third quarter and recover somewhat with a 3.3% dip in the fourth quarter. In 2015, the sector’s earnings are estimated to fall 2.3%. The graph will pick up in 2016 with projected earnings growth of 18.1%. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)
We select few companies that have the potential to beat earnings in their upcoming releases despite the bleak outlook for the sector. An earnings beat would reinstate investor confidence in the stocks leading to immediate price appreciation.
How to Make a Choice?
With a number of players in the industry, picking the right stocks is a daunting task. However, the Zacks proprietary methodology makes it easier. One can narrow down the list with the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP.
Earnings ESP shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. It helps in determining stocks that have high chances of delivering earnings surprises in their next earnings announcement. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Here are three gold mining stocks that have this compelling combination and are set to surprise this earnings season:
Agnico Eagle Mines Limited (AEM)
Toronto, Canada-based Agnico-Eagle Mines Limited primarily explores for gold and has exploration operations in Canada, Europe, Latin America, and the United States. Its flagship property, the LaRonde mine in Quebec is one of Canada’s largest operating gold mines. Agnico Eagle Mines currently has a market capitalization of $5.13 billion.
This Zacks Rank #3 stock delivered in-line results in the last quarter. The Zacks Consensus Estimate for the second quarter is at 6 cents and Earnings ESP is +16.67%.
Agnico Eagle Mines’ acquisition of Osisko jointly with Yamana Gold, Inc. (AUY) will boost its earnings profile and cost structure. The company has also secured access to Canadian Malartic, the largest producing gold mine in Canada which has the potential to produce an average of roughly 600,000 gold ounces per year for 14 years. Agnico-Eagle maintains a solid exploration budget and is reinvesting in its assets to enhance the output. Moreover, the company’s revised life of mine plan is expected to yield significant free cash flows over the next several years.
- Agnico Eagle Mines is slated to report its second-quarter results after the market closes on Jul 29.
Eldorado Gold Corp. (EGO)
Headquartered in Vancouver, Canada, Eldorado Gold is a gold producer with mining, development and exploration operations in Turkey, China, Greece, Romania, and Brazil. The company has a market capitalization of $2.36 billion.
This Zacks Rank #3 stock has an impressive long-term expected earnings growth rate of 37.40%. The Zacks Consensus Estimate for the quarter is pegged at 1 cent with an Earnings ESP of +100.00%. The company had delivered a positive earnings surprise of 50% in the first quarter.
Eldorado Gold’s AISC during the first quarter was $729 an ounce, among the lowest in the industry. It is well poised to meet its annual production guidance of 640,000-700,000 ounces of gold at an AISC between $960-995 per ounce. Eldorado, which is one of the largest foreign investors in Greece, stated that it will be able to sustain its operations in Greece even as it imposes capital controls. Recently, Eldorado has received project permit approval for its Eastern Dragon Project in China which is touted to be one of the highest quality gold assets in the country. Once in full production, the company expects it to produce approximately 70,000 ounces of gold annually.
- Eldorado Gold Corp will report its second-quarter results after the market closes on Jul 30.
Royal Gold, Inc. (RGLD)
Denver, Colorado-based Royal Gold is a precious metals royalty and stream company engaged in the acquisition and management of precious metal royalties, streams and similar production based interests. The company owns interests on 196 properties in six continents, including interests on 37 producing mines and 24 development stage projects.
This Zacks Rank #3 stock has a long-term expected earnings growth rate of 14.6%. The Zacks Consensus Estimate for the second quarter is pegged at 28 cents with an Earnings ESP of +3.57%.
Royal Gold has recently entered into a $175 million purchase and sale agreement with New Gold, Inc. (NGD) for a percentage of the gold and silver produced from the Rainy River Project in Ontario, Canada. The project is expected to produce an average of 325,000 ounces of gold annually. Further, strengthening production at Penasquito, the continued ramp-up at Mount Milligan, and the startup of production at Phoenix will boost growth in the fourth quarter of fiscal 2015.
- Royal Gold will report its fiscal fourth-quarter results before the market opens on Aug 6.
What Next?
Price below $1,000 an ounce will be a nightmare for several producers as it is below the break-even cost for many. Cost reduction and postponing exploration activities are the only ways to stay afloat. Impending interest rate increases and a stronger U.S. dollar will keep gold prices under pressure throughout the year. However, lower gold prices along with festive and wedding season in India is expected to spruce up demand in the latter half of the year. Central bank demand will also support prices as demand from this sector has been remarkably consistent.
At this juncture, a sneak peek at the space for some possible winners backed by a solid Zacks Rank and a positive Earnings ESP could be a great idea for investors to gain from this earnings season.
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AGNICO EAGLE (AEM): Free Stock Analysis Report
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