For three consecutive years from 2013 to 2015, the general commodities markets were battered lower. As a result, the mining industry was absolutely thrashed. Investors punished major mining companies for getting over-leveraged during the boom years following the financial crisis.
One reason the miners chose to go this route is because prior to the last commodities boom, the whole industry was caught flat-footed: instead of doubling down, miners missed out on huge potential profits in the 1990s because they had hedged their production at much lower prices. Alas, following the opposite strategy didn’t pay off this time around, either.
Thankfully, the skies finally appear to be brightening for the biggest gold mining companies, as well as the broader outlook for gold mining funds.
Anglo American Recovery
The massive mining firm Anglo American PLC (AAL) is listed on the FTSE 100, London’s blue-chip stock index. Analysts have repeatedly advised people to shun the stock—yet it has actually been the best performer on the entire index of 100 firms. This has shocked basically everyone, but appears to be a case of “finding a bottom.” AAL stock prices have doubled since reaching an all-time low in late January. For some perspective, mining companies were the worst-performing on the FTSE last year.
This situation has completely reversed. For instance, Glencore PLC (GLEN) was the second-worst stock on the London benchmark index in 2015. Now, trailing just behind Anglo American, GLEN is the second-best performer in 2016. Anglo American is primarily focused on mining iron ore and diamonds.
Moreover, mining companies are leading the way with 23% gains thus far this year on the EUROSTOXX 600 index. In addition to a swift recovery in commodity prices and a better outlook for the metals markets, firms like Glencore and Anglo American have also successfully trimmed their finances by cutting debt and getting leaner.
Spending Money Again
Naturally, the improving prospects for the mining industry has prompted better-positioned miners to start ramping up investment again. As measured by capex (capital expenditures), the copper and gold mining sectors have far outpaced other related industries in fresh spending over the last two years (see chart below).
The renewed confidence is certainly a good sign. According to industry research, infrastructure outlays have grown over the last five months (from November to April) by $50 billion, nearly doubling to $108 billion total across the industry. The new spending is being seen in gold and copper projects in Canada and the U.S., Latin America, and Africa.
Another note has been in new M&A spending. Shareholders for Endeavour Mining (EDV) and True Gold (TGM) approved a merger between the two firms. As part of the acquisition, Endeavour will take over the Karma gold mine located in Burkina Faso (in West Africa).
Gold Mining ETF Rallies
Naturally, the rebound in mining has lifted exchange-traded funds that track these firms. For instance, the Market Vectors Gold Miners ETF (GDX) has surged 66% so far this year. Interestingly, after losing 75% of its value over the previous three years of bear market conditions, the fund is seeing huge outflows despite its gains. This indicates that investors are taking profits off the table as GDX rises. This puts the fund at a 19-month high, as it has also doubled in share price over the last three months.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.