Chicago, IL – February 24, 2015 – Today, Zacks Equity Research discusses Gold, part 3, including Barrick Gold Corporation (ABX-Free Report), Goldcorp, Inc. (GG-Free Report), Newmont Mining Corp. (NEM-Free Report), AngloGold Ashanti Ltd. (AU-Free Report) and Agnico Eagle Mines Ltd. (AEM-Free Report).
Industry: Gold, part 3
Link: https://www.zacks.com/commentary/37983/what39s-weighing-on-gold-mining-stocks
For the gold mining industry, demand will remain strong in the years to come given the demand for jewelry, bars and coins as well as a safe haven investment. However, the industry remains saddled by a number of headwinds. Below, we have discussed some of the key reasons and what investors in the gold mining sector can look forward to in the coming months and years:
Inherent Risks in the Industry
Gold exploration and mining is a time-consuming and expensive endeavor. Given its scarcity and remote location of deposits, exploration for new gold is difficult. Once an economically viable deposit is identified, bringing a mine on line can take a decade or more, and it requires substantial capital investment.
Moreover, the mining industry is subject to several risks such as political conflicts, environmental hazards, industrial accidents, unexpected geological conditions, labor force disruptions, unavailability of materials and equipment, weather conditions, pit wall failures, rock bursts, cave-ins, flooding, seismic activity and water conditions. However, once the mine development project is successful, returns can be enormously high, which more than offsets the risks and the capital invested.
Lack of New Projects, Production to Flatten
Annual mine production grew for the sixth straight year in 2014, edging up 2% to a record of 3,114.4 tons. Mines that have been developed and became operational in recent years continue to add to the supply stream. However, the growth in supply from such projects continues to diminish and is likely to flatten in 2015 as the supply pipeline thins.
Some gold companies, including Barrick Gold Corporation (ABX-Free Report), Goldcorp, Inc. (GG-Free Report) and Newmont Mining Corp. (NEM-Free Report), are currently high-grading at certain mines. High-grade portion of a mine is mined first as this increases the grade of the mined ore and lowers the cost per unit. However, it has its cons as it depletes reserves very quickly, thus affecting long-term supply.
Gold miners, grappling with far lower gold prices than in previous years and cost pressures, have not been in a position to invest in developing new projects in recent years. To name a few, companies including AngloGold Ashanti Ltd. (AU-Free Report) and Agnico Eagle Mines Ltd. (AEM-Free Report) have slashed capital and exploration spending. Given the lack of new projects, mine production will eventually plateau in the next couple of years.
Restricted Margins
The price decline has added to the woes of an industry that was already fighting rising costs, labor issues, strikes, delays and/or the cancellation of projects. If prices fall further, margins will be constrained as the price of gold closes in on the cost per ounce of the companies. In the wake of falling prices, the industry would see a rise in the number of producers reducing output or even shutting down operations.
Costs are difficult to curtail beyond a point for long, so miners will only become profitable if gold prices rise in response to demand and other macroeconomic factors. Production cutbacks and mine closures would spell more financial pain for producers and investors, who have watched gold mining stocks slump.
Substitution with Cheaper Material in the Technology Sector
Gold demand in the Technology sector contracted to 389 tons in 2014, the lowest level since 2003 due to sluggish economic conditions in key markets and substitution away from gold. Volume of gold used in electronics dropped to a 10-year low of 267.3 tons due to substitution with cheaper alternatives in the production of bonding wire. Despite inferior durability, copper and palladium-coated copper have made vast inroads into the share of gold in the bonding wire sector and this trend will continue through 2015.
Gold also witnessed a decline of 6% in dental demand, taking the sector to a new low of 34.2 tons. The decade-long decline in the dental sector shows no sign of abating as gold continues to lose ground to ceramic alternatives, which have improved steadily in quality, strength and durability.
About Zacks
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Click here for your free subscription to Profit from the Pros.
Get the full Report on ABX - FREE
Get the full Report on GG - FREE
Get the full Report on NEM - FREE
Get the full Report on AU - FREE
Get the full Report on AEM - FREE
Follow us on Twitter: https://twitter.com/zacksresearch
Join us on Facebook: https://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
support@zacks.com
https://www.zacks.com
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.