2012 was a year many leading gold producers would like to forget. Shares of many gold producers haven’t performed well during last year. The stagnation of the price of gold during the year contributed to poor performance of several gold producers. It also eroded the revenues growth of some gold companies. Will leading gold companies be able to turn it around in 2013? Let’s examine this issue in further detail.
During 2012 the price of gold rose by only 4.6%. In comparison during 2011 gold price rose by nearly 10%. The sharp rise in the price of gold may have been driven by concerns over the potential devaluation of the USD and the inflation pressures. These concerns were plausibly stemmed from the Fed’s monetary policies including QE1, QE2 and QE3. Nonetheless, it seems these concerns, up to now, were not founded as the U.S inflation remained stable around an annual rate of 2% and the US dollar remained strong against several currencies such as Euro, Yen and Aussie dollar.
Even if you were to believe the rise in gold price was stem from the very low interest rates, which pushed the price of gold up (based on the Hotelling model), then this could mean the sharp rise in gold prices is over. The recent FOMC’s decision to keep rates low and augment its quantitative easing plan to a record high of $85 billion per month didn’t seem to help pull up the price of gold.
If gold price will remain stable, then the first to suffer are likely to be bullion companies such as Goldcorp Inc. (NYSE: GG) and Barrick Gold Corporation (NYSE: ABX). During 2012, shares of Goldcorp declined by 20%; shares of Barrick, by 29%. Assuming the fourth quarter of 2012 won’t be much better than the average of the three preceding quarters then 2012’s revenues will range from a 5% drop for Newmont Mining Corp (NYSE:NEM) to a 5% rise for Yamana Gold, Inc. (NYSE: AUY) compared to 2011.
In regards to profitability, gold producers remained very profitable (in terms of operating profitability during the first nine months of 2012) at a range from 32% for Newmont to 40% for Goldcorp. These profit margins were higher for Barrick and Yamana in 2011. So even if the price of gold won’t rise, these companies’ profitability is likely to deteriorate at the inflation rate (nearly 2%, on account of their operating expenses).
The rise in debt for certain companies such as Newmont during the year may pose a financial risk especially in such an industry with high need for cash on hand. During the year the debt-to-equity ratio of Newmont rose from 0.3 in December 2011 to 0.46 as of September 2012. For other gold producers such as Yamana and Goldcorp this ratio is very low at 0.1 and 0.03, respectively. For all of these companies, the current cash flow from operating activities isn’t covering the investing operating so that most of the above mentioned companies took on loans to cover the investing activities and dividend payments. Even though most of these companies don’t have a cash flow problem, it could eventually pose a threat for these companies’ dividend payment and future investing operations.
The Bottom Line
The slowdown in the price of gold is likely to hit the demand for gold producers’ stocks. The growth in revenues is likely to come only from taking additional investments. Some of these companies have showed a potential cash problem in the future, which could slowdown the growth in operations. As long as gold isn’t growing, major producers are likely to stay put.
For further reading:
- Gold and Silver Yearly Outlook For 2013
- Gold and Silver Prices Outlook for January 2013
- Will Gold Continue to Dwindle?
Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.