Last year, a stronger greenback, slump in oil prices and the climb in U.S. equities led to a more than 11% decline in gold’s value, the third consecutive year of loss for the metal. With the Fed finally hiking interest rates in December, thus ending an era of zero interest rates, gold slouched to six-year lows.
What Turned the Tables for Gold This Year?
Tensions between Saudi Arabia and Iran combined with an unexpected nuclear test from North Korea boosted appetite for gold.
But it was mainly about China
China's stock market has been shaken by the slowdown in the country's economy and Beijing's failed efforts to stabilize its financial markets. China’s GDP moderated to 6.8% for the fourth quarter, its lowest reading since the financial crisis. The 6.9% growth for 2015 was a marked deceleration from the 7.3% gain last year and its weakest in 25 years.
The International Monetary Fund (IMF) projects growth in China to moderate to 6.3% in 2016 and 6% in 2017, reflecting weaker investment growth as the economy continues to rebalance. Given the gloom in China, the international organization trimmed its 2016 world growth outlook to 3.4% from its earlier estimate of 3.6%. Global stocks are edging lower amid lingering concerns about China’s economy and a fresh bout of volatility in oil prices.
U.S Data Disappoints
A slew of disappointing data from the U.S. also helped prop up gold prices this year. U.S. retail sales fell 0.1% in December and were just up 2.1% in 2015, the weakest since the end of the recession in 2009. Industrial production declined 0.4% in December, falling for the third consecutive month. For the fourth quarter, industrial production fell at an annual rate of 3.4%. On top of this, yesterday’s data showed a 2.5% drop in housing starts and a 3.9% decline in building permits in December.
Signs of renewed weakness in the world's top economy raise questions about whether the Federal Reserve will be able to hike interest rates as per its earlier plans. This is a positive for non-interest bearing assets like gold.
This led gold for February delivery on the Comex division of the New York Mercantile Exchange to rise $17.10 closing at $1,106.20 per ounce. In fact, the yellow metal has been the best-performing non-agricultural commodity of 2016.
Another factor that will eventually be a tailwind for gold is that the supply of the precious metal has already attained peak levels as per reports. Global production of gold is likely to decline by 3% in 2016, thus ending a 7-year stint of rising output. Lower mined gold supply could help prices navigate north.
Performance in the Fourth Quarter So far
As per the Zacks classification, the gold-mining industry comes under the broader Basic Materials sector. Only 10% of the companies in the sector have reported their fourth-quarter numbers so far, with a 98% drop in earnings on the scoreboard. Taking into account all the companies that are yet to report, a 31.6% drop is projected for the fourth quarter.
The scenario will improve somewhat in the first half of 2016, with expected declines of 9.5% in the first and 5.7% in the second, still in negative territory. However, a dramatic recovery is projected for the latter half of the year with 9.5% growth in the third and 30.6% in the fourth. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)
At the onset of the fourth quarter earnings season, it makes sense to bet on a few gold miners that have the potential to beat earnings in their upcoming releases. An earnings beat backed by the strong growth outlook for the sector would reinstate investor confidence in the stocks leading to immediate price appreciation.
How to Make a Choice?
With a number of players in the industry, picking the right stocks is a daunting task. However, the Zacks proprietary methodology makes it easier. One can narrow down the list with the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP, which is the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. It helps in picking stocks that have high chances of delivering earnings surprises in their next earnings announcement. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Here are three gold mining stocks that have this compelling combination and are set to surprise this earnings season.
Goldcorp Inc. (GG)
Headquartered in Vancouver, Canada, Goldcorp is a leading gold producer engaged in gold mining and related activities across Canada, the U.S., Mexico and Central and South America.
The company with a market capitalization of $8.18 billion has a long-term expected earnings growth rate of 0.90%. This Zacks Rank #3 stock has an Earnings ESP of +75.00%. The Zacks Consensus Estimate has moved up 33% over the last 30 days and is currently pegged at 4 cents.
Goldcorp’s growth drivers lie in its vast array of development and exploration projects. The company expects production for 2015 to be at the top end of its guidance range of 3.3 million and 3.6 million ounces. Goldcorp continues to focus on cost management, successful replacement of mined gold reserves and the prudent allocation of free cash flow.
Goldcorp will report fourth-quarter results after the market closes on Feb 25.
Turquoise Hill Resources Ltd. (TRQ)
Turquoise Hill Resources is an international mining company with copper-gold and coal mines in the Asia-Pacific region. Its principal asset is its 66% interest in the Oyu Tolgoi mine in southern Mongolia, one of the world's largest copper-gold-silver mines. It has a market capitalization of $3.5 billion.
Turquoise Hill Resources has announced that its annual gold production of 653,000 ounces is in line with its guidance. The Oyu Tolgoi mine is expected to produce 210,000 to 260,000 ounces of gold in concentrates in 2016. In Dec 2015, Oyu Tolgoi signed a $4.4 billion project finance facility, which is regarded as an unprecedented milestone for Turquoise Hill. Work on the feasibility study and securing necessary permits for the development of the underground mine is on track. Once these steps are completed, the company expects a formal 'notice to proceed' decision in early second quarter 2016.
This Zacks Rank #3 stock has an Earnings ESP of +66.67%. The Zacks Consensus Estimate for the fourth quarter is at 3 cents and the company has delivered an average earnings surprise of 25.60% in the past four quarters.
Turquoise Hill Resources is expected to report fourth-quarter results on Mar 22.
Franco-Nevada Corporation (FNV)
Headquartered in Toronto, Canada, Franco-Nevada Corporation operates as a gold-focused royalty and stream company in the United States, Canada, Latin America, and internationally. It has a market capitalization of $6.67 billion.
In Oct 2015, Franco-Nevada closed the acquisition of Antamina silver stream from Teck Resources Limited (TCK). Antamina is expected to contribute 12,300 to 15,000 gold equivalent ounces from the fourth quarter of 2015. In Nov 2015, Franco-Nevada began funding its gold and silver stream investment in the Cobre Panama project which will be ramping up production in 2018.
This Zacks Rank #3 stock has an Earnings ESP of +8.33%. The Zacks Consensus Estimate for the fourth quarter is at 12 cents.
Franco-Nevada Corporation is expected to report fourth-quarter results on March 23.
What Next?
After years of languishing gold prices, declining output from existing mines, geopolitical tensions, a stock market rout, China worries and a possible delay in further rate hikes will work in favor of gold. At this juncture, these possible winners backed by a solid Zacks Rank and a positive Earnings ESP could be a great idea for investors to gain from this earnings season.
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