Sunday, 5 February 2012

The MVGDXJ Junior gold mining index

Close to a year ago, I first pointed to this junior mining index used as a benchmark for Van Eck’s GDXJ junior mining ETF. See : A junior gold mining index. Back then, the index was managed by the German firm “4asset-management”. Recently Van Eck took over the index calculation. Its composition and time series are now revealed on Van Eck’s website… for those to whom an access is granted. Whereas initially the access policy seemed rather liberal, now it has become restricted to ‘finance professionals’ (which doesn’t include me as a blogger.) The present posting is therefore the final one on this topic.

Index composition (by Jan 24)
This Market Vectors index for GDXJ contains 80 precious metal mining or explorer stocks. Thirteen are ‘Midcap’ miners with a total market cap exceeding $ 1 Billion. Their index weight amounts to 31%.
Only 11 miners have a full market cap below $ 250 Million. The total index weight of these 'microcaps' is 4.2%. This leaves a 56 majority of small cap miners with total index weight of 64.2%. There seems to be a ‘cut-off’ full market cap of $120 or $125M. This doesn’t leave any place for the typically more risky early stage explorers.
The MVGDXJ index is “free market float capitalisation weighted”. Index weights range between 4.93% for “ALAMOS GOLD” down to 0.17% for “ECO ORO MINERALS” (the former Greystar Resources).
‘Canadian miners’ (having their HQ in Canada and a listing on TSX) count for over 69% of the index capitalisation and 53 out of 80 miners. A 45 components majority of those quote among the pinkies in the US, while 8 have a regular US listing. The 15 Australian miners count for close to 22% of the index composition. Apart from the South African miner DRDGOLD and the Chinese LINGBAO GOLD, the remainder are US miners and UK miners (including UK tax-exempt islands and one of which has its main listing in Hong Kong).
Ten index components are silver miners or explorers.
The MVGDXJ index composition fits well with the present basket of shares in the GDXJ, which includes 81 components. Only the last item (with the lowest weight) is missing from the MVGDXJ index (valid as of Jan 24). Weights fit rather well and any difference must be due to stock performance diverging between Jan 24 and Feb 03.
Benchmark
Do juniors outperform major gold miners over the long haul? We tend to stick to the recent past in our judgements. Therefore I first make the comparison between the MVGDXJ and the Philadelphia Gold and Silver miners index XAU over the long haul. The MVGDXJ goes back to Dec 31, 2003, providing a richer lengthy time series as compared to the GDXJ launched in Nov 2009. A second graph then takes the last 18 month cycle in focus.
The exercise has been commented on before. For a good apprehension, see:
1.      Junior Precious Metal Miners Outperform (March 2011) and
The present graph runs to Jan 23, 2012. For your information, this is immediately before Bernanke announcing a few more years of near zero interest rates in USD and effectively sending gold rallying $100/Oz in a few days.

MVGDXJ (left scale) and XAU (right scale) compared over the long term (click to enlarge)

Mid term comparison between MVGDXJ (left scale) and XAU (right scale) (click to enlarge)

The conditions under which juniors are likely to outperform were pointed out before:
·        Gold prices climbing steadily,
·        Gold mining majors responding to the rising gold price,
·        General stock markets are rising.

Gold price volatility is unfavourable for major miners as they then trim their cash flow outlook to account for possible ‘unpleasant surprises’. Gold price volatility further compels majors to prudence while evaluating new projects: gold price estimates for future production are chosen to the safe side and a higher internal rate of return (IRR) is required. No need to explain how this holds down the valuations of their aquisition targets: promising explorers.
None of the above conditions were fulfilled in autumn 2011 and the precious metals exploration sector predictably ended the year in tears. Most of the gain relative to the Philadelphia Gold&Silver miners index was lost by December 2011 as explorers and juniors reached their lows. The above graph even understates the true retreat as the index component weighting is slanted towards producing mid tier miners. Those were less affected by the slump than were the explorer plays.
The year 2012 has brought some relief. The ties that held down juniors have finally been unstrapped and since very soon in January, we witness the MVGDXJ outperforming the XAU again.

Further reading:

More similar papers are linked to in the top section of the list of blog articles.

No comments:

Post a Comment