Gold Stocks Could Be Ready For Gains On Strong Operating Margins

Photo: Gold Stocks Could Be Ready For Gains On Strong Operating Margins

After showing off some impressive performance in 2016, the stocks of major gold mining companies haven't been much to look at this year. Despite some of the negativity surrounding the sector, there is no reason to think that the stocks of the gold mining heavyweights will be at their current levels forever.

It is easy to get caught up in the moment. When stocks are rallying hard, everyone will be interested in picking them up. But when well run companies share prices are as much as 50% off the highs they were trading at last year, it may be time to look at what is happening outside of the exchange. For many of the largest gold miners out there, the fundamental story for their businesses is looking better all the time.

This summer saw a string of earnings surprises from miners like Goldcorp and Barrick, but the reaction of the market wasn't long lasting. The price of gold has been more or less stable since that string of earnings reports hit the wires, so it is curious to see the price of gold shares continue to wander along without much direction. This time may represent a buying opportunity, though it is likely wise to view the purchase of gold shares as an investment instead of a speculation.

Who Doesn't Love A Sale?

As Rick Rule points out, if you are looking to buy a consumer product, you would be happy to see a sale where that product is marked down by 40%, or more. In the case of gold shares, this is exactly the situation, but instead of taking advantage of the markdown, investors are wary of buying at low levels!

Gold production has been more or less the same from a year before overall, but Weighted-average all-in sustaining costs, or AISC, were down about 7% in the June quarter to US$845/oz. Last year they were US$910/oz in the second quarter, so clearly the world's gold miners should be seeing some extra profit coming down the line, even in a market with a steady gold price.

Barrick (NYSE.ABX) has led the industry in both production and lowering AISC, and today it sits around $730usd/oz. This is substantially lower than the industry average, and they also pay a healthy dividend. At $16.50 Barrick has come off their 2016 highs by around 30%, so while not a half-off sale, Barrick is currently trading in a range that may offer gold investors value. During its fall below $20usd a share, Barrick upped earnings per share by more than 50% during Q2 of 2017.

Invest Smart

There are many ways to gain exposure to gold. Buying the big miners is just one way to leverage a rise in gold price, and also take advantage of a business model that is beautiful in its simplicity. Doug Casey has compared gold miners to an archaic locomotive, but there are some advantages to a business that doesn't rely on creating the next hot smartphone, or could have its entire business upended by a technological breakthrough.

Mining is a simple process, but it produces a unique good that can't be had any other way. If you are wondering about how to best invest in mining, or what kinds of options are out there, attending the upcoming Silver and Gold Summit in San Francisco on November 20th would be a good step in the right direction. Metals gurus like Doug Casey and Marin Katusa will be presenting their ideas on metals and mining, and you are sure to walk away with new information that will make investing a whole lot easier!