We often hear the claim that gold producers have not met investors'
expectations for the past couple years. While there are many potential
reasons for this, one explanation for their underperformance lies in the fact
that producers diluted their share structures, leaving shareholders with
smaller gains than they would have otherwise harvested.
To show how this dilution has impacted the industry, let's first
review how gold miners performed last year compared to the S&P 500.
(Click on image to enlarge)
The chart is hardly a surprise: the precious-metals producers had a
poor showing, losing 26.6% in 2012 – something we think will reverse this
year – while stocks in the S&P 500 delivered a solid 14.2% annual gain.
We think that while last year's performance of the S&P 500
companies is commendable, the future may disappoint investors who believe the
US economic recovery is on solid footing: last week's GDP data suggest that our
economy continues to struggle, something that was immediately reflected in
the price of gold the day the news was released. As 2013 progresses, we
expect to see more signs of a weaker economy and subsequently, stronger gold
prices.
But let's look at the bigger picture to see how the S&P 500 has
expanded as a group during the past decade. To measure the rate of expansion,
we plotted the total market capitalization against growth of shares
outstanding. The idea here is to compare the rate of S&P 500 share
dilution to the change in size of the companies. Size does not equal
performance (we'll look at that in a moment), but it gives a rough idea about
how much market value investors may have gained had there been no dilution at
all.
(Click on image to enlarge)
[Technical note: We did not include all S&P 500 companies in the
above chart – only those for which share structure data was available since
the first quarter of 2003. For example, Google went public in 2004 and was
not included. We followed the same method with the HUI Index, with the only
stock excluded being New Gold Inc. (T:NGD).]
Since there is little growth in shares outstanding, the majority of
the market capitalization (Mcap) growth can be attributed to share price
performance.
The total Mcap of the S&P 500 increased by 78.6%, or about 6% per
year on a compounded basis. And no wonder – the sector includes a lot of
large stocks that do not grow at the same rate as mining juniors. However,
the chart also shows how quickly market value can shrink when a crisis hits.
Let's now have a look at what happened to the HUI constituents within
the same time frame.
(Click on image to enlarge)
There are two observations to be made from these charts. First,
compared to S&P 500 companies, gold producers grossly overissued new
shares. Since 2003, as a group, they more than doubled their shares
outstanding, significantly diluting existing investors.
Second, despite the large increase in shares outstanding, HUI
companies have grown their market capitalization by 302.5% as of the fourth
quarter of 2012, quadrupling the size of the group. This comes in stark
contrast to the 78.6% growth of the S&P 500. On a compounded annual
basis, gold companies grew at 14.9% annually for the last ten years, more than
twice as fast as the S&P.
So while shares outstanding of the gold miners were increasing at a
high rate, the market capitalization of the HUI constituents outpaced the
growth of shares outstanding, because the assets miners purchased with the
funds they received from the new shares generated extra value. Since market
capitalization doesn't necessarily expand when new shares are issued, it's
the price performance that accounts for this growth.
Looking at the next chart, you can see that the performance of gold
stocks continues to be both stronger and more volatile than the S&P 500.
Note that we didn't modify the indexes here – these are the performance
numbers that investors have been looking at for the past decade, and they
make the case that the gold-mining sector has been far from lackluster.
(Click on image to enlarge)
The gold-mining sector has been outperforming the S&P 500 for the
vast majority of the last decade.
While the difference in performance between the HUI and S&P 500 is
easily visible, the gold-mining sector is currently facing a challenging
time. It can no longer grow at the pace it has in the past – mainly because
the investors who demanded higher production numbers several years ago have
seen the adverse effects of issuing shares to finance that growth. Now the
focus is on efficiency and economics, and rightly so.
While the sector readjusts itself to meet the demand of its shareholders,
your Casey metals team continues working hard to bring you only the best of
the best from the industry. There are producers with outstanding management
teams and great assets that are on sale; tomorrow's new issue of BIG GOLD recommends a new
company that meets these criteria so well that we're making it an immediate Best Buy.
Gold and Silver HEADLINES
Mining in Canada's North Expected to Nearly Double
by 2020 (Mining.com)
The Conference Board of Canada expects mining in Canada's North to
double both output and employment by the end of the decade.
Canada is acknowledged as a top mining jurisdiction, and the country
has kept this status for many years. However, to remain at the top of the
mining world will require that some issues be addressed by government
officials, local communities, and mining companies, such as infrastructure
challenges, regulatory uncertainty, skill shortages, and Aboriginal rights.
"Mining is the future economic driver of Canada's North. To fully
reap the benefits of this potential, we must find the right balance between
risk and opportunity. … Many northern and Aboriginal regions continue to
worry about the effects that mining projects may have on their lands and on
the environment. Such issues can only be resolved through dialogue,"
said Anja Jeffrey, director of the CBC Centre for the North.
Gold Imports Soar in India as Wedding Season
Approaches (Mineweb)
Gold is vital to the Indian population, especially during the wedding
season that starts in early February and continues until May. That's why
bullion traders across the country imported considerable amounts of gold
during first three weeks of January before the Indian government hiked
customs duties. Gold imports soared by 15% to 75 tonnes in January.
Despite an 81% price hike in domestic prices, India's bullion imports
rose to $56 billion from $21 billion between 2009 and 2012. This makes the
government continue its harsh measures to curb demand.
Our view is that even the most severe attempts the government may take
in regard to gold import duties won't be enough to prevent Indians from
purchasing gold. They will, however, be a boon to black marketeers.
Swiss Banks Hike Charges to Store Gold in Their
Vaults by 20% (Mining.com)
Swiss gold-market majors UBS and Credit Suisse have reportedly hiked
their charges for holding the yellow metal – typically around 0.05-0.1% of
the value –by as much as 20%. The change is caused by new banking rules that
require greater capital reserves.
The news caused a stir among gold traders, as the new rules will help
UBS and Credit Suisse to make their clients move to so-called "allocated"
accounts from "unallocated" ones, which are the norm at the moment.
Allocated gold accounts are better protected in case of bank failure, though
they are generally more expensive.
Switzerland has always been a significant hub for physical gold storage,
but this move will likely open up opportunities for rivals. As industry
executives say, non-Swiss banks are considering building new vaults to take
advantage of the changes made by UBS and Credit Suisse.
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