Gold Mining Sector Facing Tough Headwinds - Banyan Hill Publishing
(Kitco News) - Rising energy, growing production costs and lower commodity prices will be major headwinds for the precious metals mining companies going forward, according to one sector analyst.
Matthew Badiali, natural resource analyst at Banyan Hill Publishing
In an interview with Kitco News, Matthew Badiali, natural resource analyst at Banyan Hill Publishing, said that he is choosing to sit on the sidelines of the mining sector because gold producers will continue to struggle following a disappointing second-quarter earnings season.
The mining sector as seen in the NYSE Arca Gold BUGS Index ($HUI) has been relatively stable through th year but in the last month has succumbed to the bearish sentiment in the global gold market. In the last month the HUI index has dropped 11%, last trading at 159.92 points.
Badiali’s stance on the sector has shifted from his bullish outlook at the start of the year when he saw strong potential for major precious metals producers.
“I wasn’t expecting to see gold selloff this sharply,” he said. “I just don’t understand how the U.S. dollar can be this strong with all this political uncertainty.”
Although Badiali is not recommending investors jump into the mining sector right now, he views the second quarter earnings season as a good bellwether moving forward. He explained that companies who are reporting positive earnings this quarter, in an environment of falling gold prices and rising energy cost, could be big winners when the market eventually turns around.
“I don’t do a lot of charting but if you look at the price action, it looks like we are heading into a bear market,” he said.
The mining sector has seen mixed results during the latest 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 $1.1 billion 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 per share, 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.
However not all mining companies had a disappointing second quarter. Yamana Gold (NYSE: AUY, TSX: YRI) saw net earnings increase to $18 million or 2 cents per share, reversing last year’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’s second quarter gains of $84 million.
Badiali said that he was impressed with Pan American Silver’s (TSX: PAAS) latest earnings. The company reported net earnings of $36.7 million or 23 cent per share, up from 2017 second quarter gains of $36 million or 15 cents per share. He added that the gains were made when silver has struggled and underperformed against gold.
“If gold miners had a bad quarter then silver producers should have been crushed,” he said.
Another company that Badiali said he was impressed with was OceanaGold (TSX: TO), which reported second quarter net earnings of $47.7 million, up from $24.8 million from the same period last year.
“These were two clear winners in the second quarter and they 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 on costs and production are going to be the companies that will see the biggest gains 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 to revisit now.
“What we are seeing from the fourth quarter of last year to now is a test of management,” he said. “We had just enough time in a good environment for management to get lazy again. If they did, we saw that in these second quarter numbers.”
As to when Badiali will be ready to jump back in, he said that he needs to see gold, copper and oil prices stabilize.
“If we see gold find a bottom and oil prices find a top then I would be looking at the miners again. I will be looking at the companies that are currently beating the tide like Pan America and Oceana,” he said.