Monday, 12 March 2012

Long-term performance of large-cap precious metal miners

You are reading an article dated March 2012. Both gold bullion and miners are much lower now (Feb 2017). Moreover the HUI composition changed, but miner performance disparity continued unabated...

Abstract
There are a couple of benchmark indices around composed of major precious metal miners. The more common one is the AMEX Unhedged Gold Miners index with ticker symbol HUI. The index is around since 1996 and it counts 16 components. There have been several changes last few years, but I will use the present composition in this posting. Along with the company name and symbol goes the index weighting.
Additionally, I've calculated what a $1 investment back in summer 2002 would result in now (closing prices of March 9, 2012). Over almost ten years, there is a dramatic difference in gain, resulting from an investment in these miners.

The HUI versus gold bullion
The aggregate gain of the HUI is 4.750 over nearly 10 years: $1 invested turned into $4.75 over a decade. Gold was fixed at $304.7/Oz that mid summer day (Jul 31, 2002). This results in a historic HUI/Gold ratio of 0.352. Presently the ratio is at about 0.300, which implies that gold has been outperforming the miners even over the long haul.
However, in the early gold bull years, the AMEX unhedged gold miners index has outperformed gold bullion dramatically. From a low at 36 in november 2000, the HUI index quadrupled to 147.8 over 18 months to peak early June 2002. At our reference date, a first major correction had taken its course and the HUI was down to 107. (The bursting of the tech-bubble caused some ripple effects into the gold market.)
Expectations of rising future profits propelled the HUI in the early gold bull years. We soon learned that those expectations could not be met.

HUI index since 1996 (in blue left axis) and HUI/Gold ratio (in dark green right axis)
Nevertheless miner outperformance was to resume after this summer 2002 pullback and the HUI/Gold ratio peaked at above 0.60 with the HUI at 256 in early January 2004. Gold quoted at $420/oz back then. Until early 2008, the HUI/gold ratio remained in a 'trading range' between 0.40 and 0.60: an equilibrium which the financial crisis was to fundamentally disrupt. Contrary to the pull back in gold, miners fell off a cliff, with the HUI/Gold dropping from 0.50 to below 0.20 in few months time. The recovery has been swift in 2009 till early 2010, with miners gaining back somewhat but eventually failing to catch up with gold bullion. You can check out the short term graphs of the HUI/Gold ratio on the gold miner pulse page, which is updated weekly.

AMEX Unhedged gold bugs composition
The index is around since 1996 and it counts 16 components. There have been several changes last few years. Along with the company name and symbol goes the index weighting. The table is sorted by index weight. In the column 'Long Term Gain', the present value (closing prices of March 9, 2012) of a $1 investment on July 31st, 2002 is shown. Over almost ten years, there is a dramatic difference in gain, resulting from an investment in these miners.

AMEX Unhedged gold bugs (HUI) Index Components as of: 12/01/11

Company Name
Symbol
% Weighting
Long Term Gain
AMEX Unhedged gold bugs
^HUI

4.750
Goldcorp Inc
GG
16.20%
5.979
Barrick Gold
ABX
15.37%
3.210
Newmont Mining
NEM
10.88%
2.462
Harmony Gold Mining Adr
HMY
5.21%
1.140
Coeur d'alene Mines
CDE
5.11%
1.767
Yamana Gold
AUY
5.00%
7.008
Anglogold Ashanti Ltd Ads
AU
4.88%
2.157
Gold Fields Ltd Adr
GFI
4.80%
1.395
Randgold Resources Ads
GOLD
4.71%
35.461
Iamgold corp
IAG
4.43%
4.232
Eldorado Gold Corp
EGO
4.34%
19.627
Hecla Mining
HL
4.14%
1.597
Comp de Minas Buenaventura Ads
BVN
4.08%
8.606
New Gold Inc
NGD
3.90%
4.545
Kinross Gold
KGC
3.85%
2.216
Agnico Eagle Mines
AEM
 3.11%
3.206

Only five miners outperform the HUI index. The first and second prove a rather spectacular outperformance: A $1 investment in Randgold has grown into more than $35 over a decade,while a $1 investment in Eldorado Gold now is worth just short of $20. The three other outperformers are Comp de Minas Buenaventura, Yamana Gold and GoldCorp. New Gold, the latest addition to the HUI, is almost at par with the rise of the HUI index over a decade. Also Iamgold falls only little short of the HUI index performance.
Particularly poor picks are the South African Miners. They lost track of the HUI index performance. Whereas Anglogold Ashanti doubled, you are off worse with a $1 investment in Harmony Gold, which yielded only 14ct over a decade.
Both silver miners included in the HUI are poor picks likewise, with a 77% gain for Coeur d'Alène and a 60% gain for Hecla Mining... over a decade.
The bellwethers Barrick Gold (3.210) and Newmont (2.462) have been laggards as well. Barrick wasted a fortune in buying back its hedge book... or rather in waiting too long to do so.
Kinross Gold is definitely in a slump after its expensive acquisition of Redback Mining, the stock just more than doubled over a decade. Agnico Eagle must have fallen back dramatically in this ranking after having to close down its Goldex mine because of rock instability. Thanks to prior outperformance, the stock still more than tripled over the decade.

Graphs 
In 3 graphs the 14 gold miners of the HUI are shown, indexed using Jul 31, 2002 as the reference. The two silver miners CDE and HL are not included.


The outperformers (using a logarithmic scale) - click to enlarge
The outperformance of Randgold and Eldorado is quite striking: enough to choose a logarithmic scale in order not to dwarf the three other outperformers in the comparison. Eldorado and Randgold have been performing more or less in line. The acquisition of European Goldfields by Eldorado early 2011 proves a setback for stock appreciation.
Yamana makes a poor start and it lasts till late 2004 before the stock finally starts getting traction. BVN is still outperforming both Yamana and Goldcorp, but seems to be losing its edge lately.

The second tier gold miners: trying to catch up with the HUI - click to enlarge
New Gold is probably the more volatile stock in this selection of miners performing more or less in line with the HUI or trying to catch up. While outperforming early on, New Gold suffered most heavily during the financial crisis. Likewise Iamgold suffered during the 2008 market implosion, but took less time to recover. The stock sold off more heavily during the 2011 miners slump.
Agnico Eagle has a peculiar performance profile: lagging in the initial 2003 rally (the volume mined was quite a lot lower in those days and additional financing was needed). The stock then outperformed while increasing output volume and improving profitability. The closure of its Goldex mine due to rock instability and the challenges faced at Meadowbank slashed the share price in half.

The laggards among the HUI components - click to enlarge
Among the 'laggards', Kinross has a peculiar graph profile. After lagging during the initial 2003 rally, the miner has been recovering and performing more or less in line with the HUI until after the financial crisis. After Kinross decided to acquire RedBack Mining, the slide began, making the miner lose 50% relative to the HUI index. Redback shareholders obtained about 40% of the capital after the merger. The decline seems overdone, but restauring confidence is a lengthy process unfortunately.
Newmont performs more or less at par with Anglogold Ashanti, the better of the South-African miners.
Investors in Gold Fields hardly profited during the gold bull decade with a disappointing 40% advance, but again: you were even worse off with Harmony Mining with a measle 14% gain.

Further reading:

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

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