The gold mining industry has enjoyed a huge bounce-back so far in 2016. As earnings season for the second quarter commences, we’re still seeing a bright outlook for the sector as a whole.
A number of factors have contributed to this ongoing resurgence following years of a painful bear market.
Margins Improving for Gold Mining
One of the key developments for the gold miners has been the vast improvement of these companies’ profit margins. Although it is far from the only measure used to evaluate the health of a company, profit margin is one of the most basic ways to judge viability and performance. Second-quarter results have been strong for miners as earnings season continues to unfold. This stands in strong contrast to the theme of dwindling profit margins across the general markets.
In many cases, like that of IAMGOLD (IAG), the wider margins have been the result of dual forces: On one end, the higher gold price is helping to drive up revenues, while on the other end, lower cash costs compared to the same time last year have been one of the effects of lower oil prices. It appears that the impetus for cutting debt and making operations more efficient during the lean years of the bear market from 2013 to 2015 is paying dividends. Many prudent miners who followed this path are now in a much better position to capitalize fully on the current rally in gold prices.
This is especially true of some junior gold miners. Hecla Mining (HL) has seen its share price jump 240% from its low point in January. Meanwhile, the sector continues to be led by Coeur Mining (CDE), which has advanced a staggering 500%—sixfold—this year!
It’s not just the little guys who are reaping all of the benefits, either. Major producers like South Africa’s Randgold (GOLD) have also soared so far this year. This is in spite of a less optimistic forecast by the company, speaking to its underlying strength.
Naturally, we’ve seen the heavy hitters in gold mining look to grow their asset portfolios and make new investments now that the precious metals markets have rebounded. Even junior miners like Euromax (EOX), which operates a budding copper-gold mine project, are in expansion mode.
We’re seeing the expansion and improved margins take place across the world. In Asia, gold miners in China and Russia have seen big breakthroughs. Polymetal, Russia’s largest private gold miner, now boasts ownership of one of the 10 highest-grade gold mines in the world, located in nearby Kazakhstan. By lowering their all-in sustaining costs (AISC) as low as $600 per ounce, many these firms are seeing profit margins in excess of $500/oz.
Silver Miners Push Ahead
Because the silver price has surged quite a bit ahead of the gold price this year by a ratio of nearly 2:1, it makes sense that silver miners have benefited disproportionately from this outperformance. Relative to the underlying price of silver, “silver stocks” in mining companies usually experience leveraged returns of 2x or 3x. (This is likewise true of gold mining stocks.) However, owning physical silver is still the safer route. Todd Anthony, the VP of investor relations for mining firm First Majestic Silver (FR), thinks it prudent to allocate 50/50 between the two options.
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.