Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Gold Mining Stocks

The securities of public corporations the main business of which is to mine for gold bullion are often referred to as “gold mining stocks.” The Dow Jones U.S. Gold Mining Index is a stock market index that is a weighted average of about 100 of the largest and most widely held gold mining stocks trading on major American stock exchanges. When the price of gold bullion is rising, the prices of gold mining stocks are rising. Similarly, when the price of gold bullion is declining, the prices of gold mining stocks are declining.

Two of My Favorite Gold and Silver Stocks

By for Profit Confidential

gold stocksIf there ever was an environment illustrating how risky and tough resource investing can be, the current conditions for gold stocks are the textbook example.

Resource investing is a risk-capital only endeavor. When it comes to equities, resource-related stocks should never make up the core of a long-term investment portfolio. In almost all cases, even the fastest-growing, best-managed gold stocks still perform commensurately with the underlying spot price.

One of the best junior gold mining companies I know of is Argonaut Gold Inc. (TSX/AR). The company has growing production, but the stock is way down and can’t generate any momentum.

One of the best silver companies I know of is Endeavour Silver Corp. (EXK). In the second quarter of 2013, the company’s revenues grew to $71.1 million, compared to $40.4 million. Total silver production was up 48% to 1.5 million ounces in the most recent quarter, with gold production up 159% to 19,914 ounces.

Like Argonaut, Endeavour Silver is trading near a multiyear low on the stock market. It’s followed the spot price of silver almost exactly, falling consistently in value since the beginning of 2012.

While both companies don’t seem to be doing so well on the charts, they are both good mining companies. They have growing production, are keeping cash costs below industry growth rates, and their stocks are very reasonably priced.

The problem is they will stay reasonably priced so long as the spot price of yellow precious metal either remains flat or goes down. That’s the way it works in the gold mining business. The entire industry comes down to one financial metric—the spot price.

In … Read More

Business Stalls for Equipment Manufacturers; Outlook for Precious Metal Companies Flat

By for Profit Confidential

Business Stalls for Equipment ManufacturersOne specific stock market sector that continues to be very challenging is the precious metals mining area. A combination of events has hit the precious metals producers: lower spot prices and rising costs being two of the main factors. It’s been the perfect storm for gold mining stocks, and the trend isn’t over yet.

And with reduced operating margins comes the big squeeze in capital expenditures. This is no more evident than in the well-known mining equipment company Joy Global Inc. (JOY), which has been under pressure on the stock market for the entire year.

Joy Global is a well-known manufacturer of mining equipment out of Milwaukee, Wisconsin. It’s been around since 1884, and like precious metals themselves, the company’s share price is volatile.

In the company’s latest earnings report for its third fiscal quarter of 2013 (ended July 26), total bookings for underground mining machinery dropped a staggering 42.6% to $361.2 million from $629.2 million in the same quarter last year.

The company reported original equipment orders fell 68%, with declines in all regions except China. Aftermarket orders fell 27%, with declines in all regions except North America. Foreign exchange hurt orders for underground mining machinery, which dropped by $71.0 million, according to the company.

Total revenues in Joy Global’s latest quarter fell five percent to $1.3 billion. As noted by the company’s management team, prices for industrial metals and bulk commodities have dropped 20% to 40% over the last 18 months.

Seaborne coal prices have fallen 17% since the beginning of the year, and China’s domestic coal prices have dropped almost 20%. With this backdrop, Joy Global says … Read More

Newmont—the “Best of Breed” of All Gold Stocks

By for Profit Confidential

Gold ProducersThere’s been plenty of talk around here regarding gold and whether the precious metal is heading for $2,000. In my view, the current global risk will support and drive gold higher. (Read “The Stock Market Event You Need to Guard Against Right Now.”)

For any gold investor, the question is whether to buy the physical bullion or gold mining stocks. If you like the idea of holding the actual gold, you can always fly to Dubai and buy the metal from the vending machines, like Michael outlined yesterday in his article. But for the average investor, I favor gold stocks over the higher risk of other commodity options.

An investment strategy would be to buy a mixture of exploration-stage gold mining stocks along with small to large gold producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers.

For investors interested in exchange-traded funds (ETFs), the SPDR Gold Trust ETF (GLD) is worth a look and is currently trading in a sideways channel, above the 50- and 200-day moving averages (MAs).

SPDR Gold Trust Chart

 Chart courtesy of www.StockCharts.com

At the top of my list of gold stocks is Newmont Mining Corporation (NYSE/NEM); in my view, Newmont is one of the best stocks in gold, because this stock will generate value for your portfolio for years to come. I’ll go even so far as to say that this stock is the only one you will need to own for the next decade, with its good price appreciation potential and dividend.

Missing its earnings-per-share (EPS) estimates in three of the last … Read More

Stock Market Outlook Solid Based on Earnings and Valuation

By for Profit Confidential

Stock Market Outlook Solid Based The stock market certainly isn’t going up because of stronger expectations for corporate earnings. But I think all the conservative forecasts by corporations will lead to another quarter of mostly outperformance this upcoming earnings season. Companies have consistently been able to generate good earnings, even with lackluster revenue growth. Cost cutting is paying off in terms of solid earnings results, and this is the reason why balance sheets are so strong.

With companies in such a good financial condition, a new upward business cycle should produce a major acceleration in corporate earnings. The key, of course, is jump-starting a new business cycle, and it will be awfully difficult to do this if policymakers aren’t able to address all the issues regarding sovereign debt and the fiscal cliff. Country finances are going to be a major issue next year.

The best thing the stock market has going for it right now is its reasonable valuation. (See “Equities Market Doing Fine—Just Look at the Long-term Charts.”) That gives the stock market a lot of leeway, with all the uncertainty on the horizon. We know the stock market went up recently on the hope of new monetary stimulus from the Federal Reserve. Contributing to positive investor sentiment has been quiet on the eurozone’s sovereign debt crisis, somewhat improved U.S. economic news and a weaker U.S. dollar. Whether this lasts is all up to the Federal Reserve.

There really isn’t anything more the central bank can do to stimulate the U.S. economy. Further action from the Federal Reserve will only be to appease Wall Street investors. If the central bank disappoints the stock market … Read More

Gold Stocks Breaking Out of Their Correction

By for Profit Confidential

Gold Stocks Breaking Out of Their CorrectionThe price of gold is going up, and it just crossed $1,660 an ounce. Silver crossed $30.00 an ounce. You might say that precious metals are back. You can plainly see the resurgence in gold stocks, which have really turned around from what was a considerable period of weakness. The majority of gold stocks have been trending lower all year, as the spot price has been consolidating.

Expectations for more monetary stimulus from the Federal Reserve are contributing to a weaker U.S. dollar, which is helping precious metals (and oil prices) move higher. If the Federal Reserve takes additional action at its next Federal Open Market Committee (FOMC) meeting in September, then the recent strength in gold prices should carry right into 2013. (See “Federal Reserve: Will It Act Soon to Jump Start the Economy?”) Regardless, I wouldn’t be without some exposure to gold over the near term; I think we have the makings of a new upward trend in gold prices.

Across the board, mining companies have had a tough year on the stock market. It’s as if institutional investors just abandoned the entire group. Even large-cap dividend-paying heavyweights in the gold sector have been under a lot of pressure. And the funny thing is that the spot price of gold really hasn’t corrected all that much from its record high. As is usually the case, gold investors join the bandwagon late and leave it very quickly.

Newmont Mining Corporation (NYSE/NEM) has been struggling all year. The stock was trading at $60.00 a share at the beginning of the year and hit a low of $42.95. In my view, … Read More

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