The start of the current bear market for precious metals kicked off about 2 years ago, and in the interim, the sector perhaps hit hardest by this development has been the gold miners. Mining companies have been divesting assets and finding ways to keep their balance sheets in order as falling gold prices eat into their profitability.
Gold mining stocks fell precipitously during 2014, drawing the scorn of the financial news media and providing fuel to gold bears who were calling for ever-lower gold prices. As spot prices fall, the thin margins for mining companies quickly vanish, as the cost of extracting the metal from the ground remains the same (or even rises). Some companies have actually chosen to ramp up production, even at the expense of profit margins, in order to cover their debts and operating expenses (at least partially). Canadian miner Yamana Gold (NYSE:AUY) is one example of this strategy, posting slight losses in the second quarter despite growth in output. In some cases, miners have even resorted to using derivatives in order to hedge their somewhat precarious positions. Last year, firms in the gold mining and processing industries were net hedgers for only the second year out of the last 15.
Now that the aforementioned bear market is reaching maturity, investors have increasingly turned their attention to shedding gold ETF shares and actual physical holdings; meanwhile, the consensus (judging by market behavior) seems to be that the floor is in for the mining sector.
Yet, all of the news hasn’t hinted at such improvement: Stillwater Mining (NYSE:SWC) inherently lowered its earnings expectations with an impairment charge during Q2 that totaled more than $45 million, dragging quarterly earnings $27.5 million into the negative. Platinum miner Lonmin has descended into disarray through a mix of falling prices and mismanagement, while the major mining companies in South Africa, led by AngloGold Ashanti Ltd., continue to deal with a protracted period of intermittent labor disruptions that trace back more than a year. Even global leader Barrick Gold (NYSE, TSX:ABX) saw its shares sink to levels not seen in 25 years.
Despite these pain points in the industry, the second quarter was actually encouraging for gold miners. Eldorado Gold (NYSE:EGO; TSX:ELD) plans to pay shareholders a dividend and increase production after a solid performance in the first half of 2015. Dundee Precious Metals (TSX:DPM) also eked out a second-quarter profit, and will pay a 1-cent dividend to investors. Endeavour Mining Corp. (TSX:EDV) continued to make progress on the company’s stated objectives (such as remaining profitable and reducing debt) after posting profits in Q2.
Perhaps the best performer during the bear run has been Newmont Mining (NYSE:NEM). Even in such a low-price environment, Newmont has continually posted strong revenues; the company remains far more optimistic about its near-term outlook than most of its peers despite the majority of its operations focused on gold and copper, which have each suffered during the downside of the current commodities cycle.
Is now the time to scoop up shares of the gold miners at discounted prices? Another sign of encouragement comes in the form of M&A momentum: OceanaGold (TSX:OGC) is expected to merge with Romarco Minerals (TSX:R) in deal reportedly worth $660 million. Even as the bullion market continues to trend lower, the worst may be over for well-positioned gold miners.