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Analysis of Canadian Gold Stocks' Year-to-Date Return

- By Alberto Abaterusso

The yellow metal has increased nearly 17% year to date on the bullion market and therefore also its Canadian producers. Some of them such as Iamgold Corp. (IAG) and Kinross Gold Corp. (KGC) have benefited the most from rising commodity prices as well as those investors who decided to get exposure to changes in the gold price through them.

Gold also made the most popular Canadian gold mining stocks grow on the stock market through upswings and downswings. I want to analyze those upswings in the market value of these gold stocks to see whether, other than the rise in price of the underlying precious metal on the bullion market, there were other factors worth mentioning that made these gold producers soar on the stock market and that, when the time comes, an investor should be aware of to either initiate or increase its position in these stocks.

For my analysis' convenience I have identified and divided the year to date period in five subperiods and for each of them I have measured the returns on the stock market of these Canadian gold producers, compared each other and tried to identify which events may have caused certain mining companies to gain more than others.

As you can see from the chart above, I have identified five subperiods.

During the first subperiod from Jan. 3 to Jan. 24 when gold increased by 5.70% from a price of $1,151 per troy ounce to a price of $1,216.80 per troy ounce, Kinross was the Canadian miner whose market value increased the most with almost 23.5%.

What did play in favor of Kinross' market value were expectations among investors on a stronger portfolio of assets and an increase of North American gold reserves following the company's acquisition of 100% of the Bald Mountain gold mine from Barrick Gold Corp. (ABX).

And thanks to the results of Kinross Gold's drilling program, which was undertaken at Bald Mountain, the company could increase North American reserves from 4.656 million ounces at the end of 2015 to 4.931 million ounce at the end of 2016 as reserves at Bald Mountain almost doubled to 2.133 million ounces over the same span of time. The Bald Mountain drilling program also added more resources and prolonged the estimated life of Bald Mountain mine.

  • Kinross Gold's reserves on Dec. 31, 2016.
  • Kinross Gold's reserves on Dec. 31, 2015.

During the second subperiod from Jan. 27 to Feb. 27, when gold increased 6% from a price of $1,184.85 per troy ounce to a price of $1,255.60 per troy ounce, Barrick Gold was the Canadian miner whose market value increased by 5.82%. It is unlikely that the surge in Barrick Gold's share price was a response to the company's filing of shelf prospectus, qualifying the miner for a distribution of mixed securities to investors for a total amount of up to $4 billion since the biggest producer of gold in the world said through its report for full fiscal 2016 that it didn't have any intention to offer securities according to the shelf prospectus.

The surge in the market value of Barrick Gold likely followed a robust year end of fiscal 2016 figures, resulting in raising the company's guidance on gold production from an average 5.4 million ounces for 2016 to 5.75 million ounces for full fiscal 2017 at a lower all-in sustaining cost (AISC) per ounce of metal sold ranging between $720 and $770, and to a 50% increase in the quarterly dividend from 2 cents to 3 cents. Both together with progress on projects at Cortez, Goldrush, Lagunas Norte and Turquoise Ridge were announced by the largest gold producer in the world on Feb. 15 through its website.

As a matter of fact, these three before mentioned events had a statistically significant impact - at a 95% confidence level on the market value of Barrick Gold the day after their announcement. I am assuming that the distribution of its abnormal daily returns (daily returns minus average daily returns) imitates a bell-shaped curve or a Gaussian distribution.

On Jan. 16, Barrick Gold jumped 6.1% generating an abnormal return of 5.8%.

During the third subperiod from March 15 to April 21 when gold increased by 7% from a price of $1,198.800 per troy ounce to a price of $1,281.850 per troy ounce, Iamgold's market value had a positive impact on April 11 and was statistically significant at a 90% confidence level, maybe following the news about the Fed's expectations on moderate U.S. economic growth and a monetary policy set on sustaining the achievements of low unemployment and an inflation neighboring 2% rate. Both were positive for gold since the yellow metal gained nearly $29 per troy ounce or 2.3% to $1,281.85 over the next six trading days.

Probably the market gave more credit to those mid-tier gold producers that have a higher cost operating leverage compared to their biggest peers, seeing among these gold stocks a higher possibility to gain greater returns on the stock market when there are expectations in favour of a soaring commodity.

Eldorado Gold Corp. (EGO) with 26.32% and Yamana Gold Corp. (AUY) with nearly 19% were the other two best-performing gold stocks during the subperiod.

Eldorado Gold's market value had a statistically significant - at 95% confidence level - impact on March 29 from the announcement of improved sales concentrate terms for its Olympias gold phase 2 expansion project in Greece. Translated: a yearly increase of about 15,000 ounces of payable gold production for the company.

During the fourth subperiod from May 9 to June 6, when gold increased by 6% from a price of $1,220.40 per troy ounce to a price of $1,293.50 per troy ounce, Iamgold increased by 34.57% on the New York Stock Exchange. During this period, its market value was - significantly at 95% confidence level - impacted twice:

  • May 10: following a 438% increase in the gross profit for the first quarter. Shares jumped 9.7% for an abnormal return of nearly 8%.
  • June 6: following two announcements. The first one was about the results that came from the Prefeasibility Study that Iamgold prepared for its Cote Gold project in the Canadian province of Ontario, which were very positive. And the second one was about the strategic agreement Iamgold reached with Sumitomo Metal Mining (TSE:5713) for the Cote Gold project's development. Shares of Iamgold closed the day up 12.2% for a 10.5% abnormal return.

During the fifth and last subperiod from July 10 to Sept. 4, when gold increased by 10% from a price of $1,211.900 per troy ounce to a price of $1,333.100 per troy ounce, Iamgold was again the best performer on the New York Stock Exchange with a 36.4% return. During this period, its market value was significantly impacted on Aug. 16 from Iamgold's announcement of - dated two days before - to purchase a 19.98% stake in TomaGold Corp. (LOT.V), a Canadian explorer with whom Iamgold has a 50% joint venture agreement on the advancement of the Monster Lake gold project in Quebec, Canada. The transaction evidently has been perceived being very important by investors as it opens Iamgold's doors to the exploitation of several mineral properties that TomaGold has in its portfolio. At a 95% confidence level, the market value per share of Iamgold was up 5% at close for an abnormal return of 3.7%.

During this subperiod the market value of Yamana Gold was also significantly impacted on Aug. 16. That day Yamana Gold had a daily return of 5.8% generating an abnormal return of 5.2%, which was statistically significant at a 95% confidence level.

Probably Yamana Gold being able to mine at profit already from $1,150 per ounce, was perceived that day by investors as one of the gold stocks whose margins would be boosted the most by a climbing gold price fueled by global political risks mainly due to escalating tensions between the U.S. and North Korea, and a rise in the demand from China and India that are the world's biggest consumers of the yellow metal.

There were also two statistically significant impacts on the market value of Newmont Mining that gained 20.7% over the fifth subperiod:

  • On Aug. 28: shares of the U.S.'s biggest gold producer jumped 3.5% for an abnormal daily return of 3.1%, which was significant at a 95% confidence level. The rise in gold prices, due to weakness in the dollar and ongoing geopolitical concerns, was supportive for Newmont Mining.
  • On July 25: following second quarter of fiscal 2017 figures with which the U.S. miner beat expectations on both earnings and revenue as a result of increased production that benefited from additional contributions of Merian and Long Canyon mines. The improvement from the previous year in the company's guidance on gold production for full fiscal 2017, on gold cash to applicable sales per ounce and on the AISC per ounce of metal sold also played to a rise in the market value of Newmont Mining.

When investing in the gold stock industry other than the Fed's monetary policy, macro and other geopolitical factors that can influence the price of gold and therefore the share value of its producers, investors should prefer those gold mining stocks with a rich pipeline of development projects and exploration programs, which results are in process of being released to the public.

Those gold producers that have either shown some strength in their exploration results or successfully delivered a robust gold project on schedule and within the budget's limits, tend to significantly outperform other gold miners on the stock market since there is a renewed optimism about these miners' future growth outlook among investors, traders and analysts.

Analysts raise their estimates on the gold stock's revenues, earnings and therefore their ratings soon after the company has released positive exploration results, has increased resources and reserves or has enhanced its guidance on near-term gold production and lowered costs.

For the remainder of fiscal 2017, one of the gold mining stocks to look at closely is Iamgold. Following the positive results from the exploration program at Saramacca and the release of the NI 43-101 Technical Report about the enhancement of gold reserves at Rosebel, which both determined a nearly 7% increase in Iamgold's market value in only two trading days to a current $7.15 per share, the Canadian gold producer is going to release other results that may push - assisted by a rising in the commodity - the price even higher.

As Stephen Letwin, Iamgold's president and CEO, said during the presentation of the company's first fiscal quarter results, the management "expect 2017 to be an exciting year for exploration as they are on track to expand the company's footprint at the Falagountou satellite pit to feed the Essakane mine, and target initial resource estimates at Monster Lake in Quebec and Eastern Borosi in Nicaragua."

Enjoy the ride.

Disclosure: I have no positions in any stock mentioned in this research.

This article first appeared on GuruFocus.