While gold was staging its multiyear rally that culminated in late 2011, traders and investors flocked both to the metal, and gold mining stocks.
Unfortunately, many of those same traders and investors found themselves still hanging around well after the music stopped.
Gold mining has always been a difficult, high-cost business, but when the metal’s price is in decline, it becomes an outright horrible business. Jewelry and investment demand for gold both fell in 2012 and is likely to follow suit again in 2013. Although demand from India perked up late in 2012, much of that had to do with purchases being bought forward in fear of a gold import tax.
Gold miners have focused on expanding production at very high costs, and as the price of the metal has declined, earnings and prospects have been decimated.
Newmont Mining (NYSE:NEM) reported earlier this week, and earnings of 71 cents per share were 31% lower than they were in the year-ago period, and well shy of Wall Street expectations for 78 cents. Total gold production was down, and revenues declined by 18% in the quarter. NEM is now focusing on controlling production costs and will be cutting back on new projects. The stock receives a grade of “D” from Portfolio Grader, indicating a “sell” recommendation.
Goldcorp (NYSE:GG) reported yesterday, and results were equally horrific. The company reported earnings of 31 cents per share compared to 50 cents a year earlier. Total gold production declined 17% in the quarter, and as a result, revenues fell from $1.211 billion to just $1.011 billion. Analysts had expected earnings of 41 cents per share on revenues of $1.3 billion, meaning GG negatively surprised on both fronts. Goldcorp should see production increase in 2013 as a new mine comes online, but the related expenses will keep the money from flowing through to the bottom line. This stock also has earned a “D” grade from Portfolio Grader and should be sold immediately.
Goldcorp and Newmont aren’t outliers, either.
Gold mining stocks as a whole are struggling to reduce costs and have made a strategic error of overspending on new exploration and mining operations during the bull market. Even if gold prices should fully recover, it will not be enough to ignite revenue and earnings growth for these companies.
Virtually all of the gold miners are currently rated sell or strong sell by Portfolio Grader right now. I suspect it will be some time before this changes.
Louis Navellier is the editor of Blue Chip Growth.