Gold Mining Sector Facing Tough Headwinds - Banyan Hill Publishing
(Kitco News)- Rising energy, growing production costs and lowercommodity prices will be major headwinds for the precious metals miningcompanies going forward, according to one sector analyst.
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| Matthew Badiali, natural resource analyst at Banyan Hill Publishing |
In an interview with Kitco News, Matthew Badiali, naturalresource analyst at Banyan Hill Publishing, said that he is choosing to sit onthe sidelines of the mining sector because gold producers will continue tostruggle following a disappointing second-quarter earnings season.
The mining sector as seen in the NYSE Arca Gold BUGSIndex ($HUI) has been relatively stable through th year but in the last monthhas succumbed to the bearish sentiment in the global gold market. In the lastmonth the HUI index has dropped 11%, last trading at 159.92 points.
Badiali’s stance on the sector has shifted from hisbullish outlook at the start of the year when he saw strong potential for majorprecious metals producers.
“I wasn’t expecting to see gold selloff this sharply,” hesaid. “I just don’t understand how the U.S. dollar can be this strong with allthis political uncertainty.”
Although Badiali is not recommending investors jump intothe mining sector right now, he views the second quarter earnings season as agood bellwether moving forward. He explained that companies who are reportingpositive earnings this quarter, in an environment of falling gold prices andrising energy cost, could be big winners when the market eventually turnsaround.
“I don’t do a lot of charting but if you look at theprice action, it looks like we are heading into a bear market,” he said.
The mining sector has seen mixed results during thelatest earnings season. Many of the major producers have disappointed analysts’expectations. The world’s largest gold producer Barrick Gold (NYSE: ABK,TSX: ABX)saw a net loss of $94 million or 8 cents per share, after recording a $1.1billion profit in the second quarter of 2017.
Goldcorp (NYSE: GG TSX: G)was a big surprise as it reported a net loss of $131 million or 15 cents pershare, down from a profit of $135 million or 16 cents per share one year ago.The company saw a foreign-exchange related loss of $178 million.
Kinross Gold Corp (NYSE: KGC,TSX: K)report adjusted earnings of $37.8 million or 3 cents per share, down fromearnings of $54.9 million or 4 cents per share reported in the second quarterof 2017.
Agnico Eagle Mines (NYSE: AEM,TSX: AEM) said that net income fell to $5 millionor 2 cents per share down from 54.9 million or 24 cents per share recorded lastyear.
However not all mining companies had a disappointingsecond quarter. Yamana Gold (NYSE: AUY,TSX: YRI)saw net earnings increase to $18 million or 2 cents per share, reversing lastyear’s second quarter loss of $39.9 million or 4 cent per share.
Newmont Mining (NYSE: NEM)reported net income of 274 million or 51 cents per share, up from last year’ssecond quarter gains of $84 million.
Badiali said that he was impressed with Pan AmericanSilver’s (TSX: PAAS)latest earnings. The company reported net earnings of $36.7 million or 23 centper share, up from 2017 second quarter gains of $36 million or 15 cents pershare. He added that the gains were made when silver has struggled andunderperformed against gold.
“If gold miners had a bad quarter then silver producersshould have been crushed,” he said.
Another company that Badiali said he was impressed withwas OceanaGold (TSX: TO),which reported second quarter net earnings of $47.7 million, up from $24.8million from the same period last year.
“These were two clear winners in the second quarter andthey aren’t major producers,” he said. “When you look at revenue, Ebitda[Earnings Before Interest Taxes, Depreciation And Amortization] production,these companies, management are doing something right.”
Badiali said that companies that are keeping an eye oncosts and production are going to be the companies that will see the biggestgains when prices start to pick up. He added that moving forward, these themes,which dominated the recent five-year bear market, are going to be important torevisit now.
“What we are seeing from the fourth quarter of last yearto now is a test of management,” he said. “We had just enough time in a goodenvironment for management to get lazy again. If they did, we saw that in thesesecond quarter numbers.”
As to when Badiali will be ready to jump back in, he saidthat he needs to see gold, copper and oil prices stabilize.
“If we see gold find a bottom and oil prices find a topthen I would be looking at the miners again. I will be looking at the companiesthat are currently beating the tide like Pan America and Oceana,” he said.
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.