4 Gold Mining Stocks Glimmering Amid the Gloom - Analyst Blog

As we look at the gold price chart for 2014, it resembles a constant see-saw ride -- up one minute, down the next. Overall, it has been another harrowing year for gold, always dangerously on the verge of replicating the nightmarish 2013.

Last year, the once coveted yellow metal had lost 28% of its value -- the worst slump in more than three decades that put an abrupt end to a 12-year bull run for the metal.

The Journey of Gold This Year

In the first half of 2014, leaving aside some temporary dips, gold investors enjoyed some respite as concerns surrounding the economy and geopolitical tensions boosted its safe haven appeal and acted as catalysts for its value.

It’s worth a mention that in mid-March, gold attained a six-month high of $1,379 per ounce, stoked by Ukraine worries, fears of a slowdown in China and weak U.S. economic data that drove investors to take refuge in bullion.

Until August, gold prices held their own, remaining on either side of $1,300, dipping at times on positive U.S. economic indicators. However, the bubble soon burst as a stronger US dollar tainted the precious metal's grandeur and toppled its price.

Further, demand had been weak in its biggest markets – China and India. Starting September, prices remained steadfastly under the $1300 range and in fact showed a clear downward trend due to a stronger dollar.

Gold resumed its downhill journey in October on positive jobs report. The metal spiked to a one month high on Oct 15 on the back of a huge sell-off in equity markets following the release of three major disappointing US data.

Moreover, dour economic reports from the European Union, particularly its leading economy Germany, raised concerns about global growth and increased volatility in the markets, helping the cause of gold. Decline in oil prices dragged down stocks which helped revive gold prices.

Strong physical buying in India due to the festive and wedding season also supported gold prices. The fourth quarter is a seasonally strong period and demand remains strong with the Diwali festival in India, and Thanksgiving, Hanukkah, Christmas and New Year's in the U.S.

Again in November, gold prices fell below the psychological level of $1,200, triggered by the Federal Reserve's announcement that it would end its QE3 bond buying program, surge in equities, further fall in crude oil price and new stimulus measures by the Bank of Japan. On Nov 6, gold fell to four-and-half-year lows to $1,143 per ounce on the back of a strong US dollar and a steady climb in the equity market that kept investors away from the safe haven gold market.

Moreover, an unsuccessful Swiss referendum, which ruled out the suggestion of boosting gold reserves, was the final nail in the coffin for gold. A vote in favor would have meant the bank will have to buy a considerable amount of gold to increase reserves by around 1,500 tons over a period of five years or 300 tons per year, roughly 8% of annual gold demand. This otherwise would have had an immediate impact on gold prices.

The Final Lap

Gold prices rose somewhat, though remaining under $1,200 per ounce, ahead of the Federal Open Market Committee (FOMC) meeting as investors geared up for a Federal Reserve statement, wary of any hawkish statement. Moreover, the ruble's fall to a new low raised concerns that this may trigger gold sales in Russia. A stronger dollar and fresh five-year lows for oil saw gold sinking again to below the $1,200 an ounce level on Dec 15.

Gold, after briefly climbing above $1,200 per ounce, took a downturn on Dec 17, following the Fed’s decision to remain on track to raise interest rates in 2015, altering a pledge to keep them near zero for a "considerable time," given confidence in the US economy.

Following the dip in gold prices, share prices of some of the gold miners, like Barrick Gold Corp. (ABX), Agnico Eagle Mines Ltd. (AEM) and Newmont Mining Corp. (NEM), plunged to their 52-week lows in tandem on Dec 16.

Gold mining stocks have taken a beating this year, delivering negative year-to-date returns, due to the turbulent gold prices and disappointing earnings results and negative earnings surprise this season. Below we highlight some outperformers, which have delivered positive returns amid the chaotic circumstances.
 
Franco-Nevada Corporation (FNV)

Based in Toronto, Canada, Franco-Nevada operates as a gold-focused royalty and stream company in the United States, Canada, Mexico, Australia and Africa. The company also has interests in platinum group metal, oil and gas and other resource properties. Its principal portfolio includes approximately 370 assets covering properties at various stages from production to early stage exploration.

On Nov 5, Franco-Nevada posted third-quarter adjusted earnings of 23 cents per share. Even though results declined 4% year over year, it surpassed the Zacks Consensus Estimate of 22 cents, a positive earnings surprise of 4.6%. Production increased an impressive 23.6% to 70,071 Gold Equivalent Ounces (GEOs).

On Oct 6, 2014, Franco-Nevada announced the acquisition of a gold and silver stream on the Candelaria project located in Chile for $648.0 million. The company will begin recording revenues from this new cornerstone asset in the fourth quarter, which should make it a particularly strong quarter.

Based on the anticipated performance of the existing asset portfolio for the rest of 2014, the company has increased its guidance to 260,000 to 270,000 GEOs for fiscal 2014 (excluding contributions from Candelaria). With contributions from Candelaria, the company expects 280,000 to 300,000 GEOs in aggregate for fiscal 2014.

Moreover, in August, Franco-Nevada successfully raised $500 million in new equity capital, which has allowed the company to remain financially strong and debt free even after committing to over $900 million in new investments in 2014.

Shares of Franco-Nevada have risen 12.9% year to date. The Zacks Consensus Estimate for the next quarter is pegged at 23 cents, projecting 9.5% year-over-year growth, and for fiscal 2014 at 94 cents, an estimated 0.43% growth. The company’s long-term growth is estimated at 9%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 48.72.

Franco-Nevada carries a Zacks Rank #3 (Hold). Given its strong balance sheet and diversified portfolio, Franco-Nevada offers a lower-risk exposure to the precious metals sector.

Lake Shore Gold Corp. (LSG)

Headquartered in Toronto, Canada, Lake Shore Gold is engaged in the acquisition, exploration and development of gold properties in Canada from two mines, Timmins West and Bell Creek. It also explores for silver ores. In addition to current operations, the company also has a number of highly prospective projects and exploration targets, all located in and around the Timmins Camp.

Lake Shore Gold reported third-quarter 2014 adjusted earnings of 2 cents per share, an improvement from the breakeven results last quarter. The company’s gold production increased 58% year over year to 45,600 ounces in the quarter. For the nine-month period, production was a record 142,500 ounces, up 72% from the comparable period in the prior fiscal.

The company is on track to produce at least 180,000 ounces in 2014 and to beat its full-year 2014 guidance for both cash operating costs and all-in sustaining costs. Effectively managing unit costs remains a priority as the company continues to focus on building its financial strength.

The company recently announced that it will repay the $20 million outstanding balance on its standby line of credit on Dec 31, 2014, thus repaying a total debt of $45 million this year. The company will eventually save over $2.4 million of interest over the remaining term of the debt (to Nov 2016), including $1.8 million during 2015.

In addition to generating strong operating results, continued exploration will remain a focal point during the final quarter of 2014. Drilling activity during the quarter is increasing as the company builds on recent exploration results at Timmins Deposit, 144 and Bell Creek. Additional mine development is also planned for the fourth quarter of 2014 in support of reserve replacement, underground exploration and execution of the 2015 mine plan.
 
Shares of Lake Shore Gold have risen 45.7% year to date. The Zacks Consensus Estimate for fiscal 2014 projects a profit per share of 8 cents, a stark improvement from the loss of 1 cent per share in the prior fiscal year. Lake Shore Gold carries a Zacks Rank #2 (Buy). Sound financial strength driven by solid operating performance during the year, record production and its status as one the lowest cost producers within the industry, makes it a compelling investment.

Richmont Mines Inc. (RIC)

Headquartered in Rouyn-Noranda, Canada, Richmont Mines is engaged in the mining, exploration, and development of mining properties, primarily gold in Canada. It operates three gold mines, including the Beaufor/W Zone and the Monique mines in Quebec, and the Island Gold Mine in Ontario. The company is also developing the Island Gold Deep project in Ontario.

On Nov 6, Richmont Mines reported adjusted earnings per share of 10 cents, a turnaround from net loss per share of 3 cents in the year-ago quarter. The miner has increased its guidance for 2014 gold production, revised for a second time, to a level of 85,000 to 90,000 ounces.

Richmont Mines continues to invest in the development of its 1.1 million ounce high-grade inferred resource at Island Gold, which has the potential to increase its annual gold production. The company recently hired a contractor to accelerate ramp development and to build out the required additional underground infrastructure. The company expects the ramp to reach a vertical depth of approximately 660 meters by year-end and to extract ounces from the lower zone at Island Gold before the end of this year.

Shares of Richmont Mines, which have gained 176% year to date, recently hit a 52-week high of $3.49 on Dec 10, 2014. The Zacks Consensus Estimate for fiscal 2014 is pegged at 11 cents, an estimated 148% growth. Richmont Mines currently carries a Zacks Rank #3.

Rio Alto Mining Ltd. (RIOM)

Headquartered in Vancouver, Canada, Rio Alto Mining, together with its subsidiaries, is engaged in the acquisition, exploration, development and mining of mineral properties in Latin America. The company explores for gold oxide, copper/gold sulphide, copper and silver properties. It holds interest in the La Arena mineral project, which consists of 20,673 hectares in 44 concessions located to the north-northwest of Lima, Peru.

Rio Alto Mining reported earnings per share of 8 cents in the third quarter, surpassing the Zacks Consensus Estimate of 5 cents. The company increased its production guidance to a new range of 215,000 to 225,000 ounces. Cost guidance was lowered on strong year-to-date performance. It lowered guidance range for adjusted operating costs per ounce to $575 to $600, all-in sustaining costs per ounce to $775 to $800 and all-in cost per ounce to $900 to $925.

Strong operational and financial performance continued at La Arena during the third quarter. The company continues to focus on the optimization of costs at the mine which has led it to beat its financial guidance for the first three quarters of the year. This trend is expected to continue through the rest of 2014.

During the quarter, Rio Alto Mining completed the acquisition of Sulliden Gold Corporation. The main asset acquired in the Transaction was the Shahuindo Gold Project located in Peru.

Shares of Rio Alto Mining have gained 28% year to date. It has a P/E (F1) of 9.7x. The Zacks Consensus Estimate for fiscal 2014 is pegged at 22 cents, an estimated 29% growth. Rio Alto Mining currently carries a Zacks Rank #3.

What’s in Store for 2015?

Looming Federal Reserve interest rate increases in the second half of 2015 while a stronger U.S. dollar will keep pressure on gold prices through the year. However, gold prices will get support from retail demand for gold, particularly in India and China.

As per the World Gold Council’s new data, India has replaced China as the world’s top gold consumer in the third quarter, as demand for jewelry surged almost 60%. On Nov 28, India eased gold import norms by withdrawing the 80:20 rule in gold imposed in Aug 2013. The directive was to re-export one-fifth (20%) of all the precious metal imported. This will support gold prices.

Gold demand is particularly high in the latter part of the year, spurred by jewelry demand for the Diwali festival and wedding season in India. Lower prices, a new government and better prospects for economic growth provides an encouraging backdrop for gold demand in India.

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NEWMONT MINING (NEM): Free Stock Analysis Report
 
BARRICK GOLD CP (ABX): Free Stock Analysis Report
 
AGNICO EAGLE (AEM): Free Stock Analysis Report
 
FRANCO NV CP (FNV): Free Stock Analysis Report
 
LAKE SHORE GOLD (LSG): Get Free Report
 
RIO ALTO MINING (RIOM): Free Stock Analysis Report
 
RICHMONT MINES (RIC): Free Stock Analysis Report
 
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