Wednesday, 27 June 2012

No mercy for gold explorers

A gold explorer ETF

Early October 2011, I pointed to the poor performance of junior gold stocks and of explorers in particular. With GLDX, the Global X Gold Explorer ETF, we have a suitable benchmark for that market segment. How has the situation evolved ever since? Let's first have a look at the GLDX graph since October 2011:

Global-X gold explorer ETF - GLDX
Global X gold explorer ETF (GLDX) the last 9 months
Doesn't look very nice, but then again: miners have been in a terrible slump, largely underperforming gold bullion over more than a year now. Are you off worse with explorers, as was the case in October?
We did witness a recovery of GLDX early 2012 and after the mid May disastreous swoon, a swift recovery followed. Yamana Gold bidding for Extorre added some spice to the rally. (GLDX has Extorre among its holdings; but on the flip side Yamana will acquire Extorre on the cheap as compared to what it quoted like a year ago).

Benchmark of GLDX / GDX (Van Eck's large-cap gold miner ETF)

GLDX:GDX: No mercy for gold explorers
There really isn't much reason for optimism. Relative to major miners, gold explorers almost seem in a death spiral. In the "contributor driven junior miner and explorer spreadsheet", introduced in a previous posting on Selecting junior miners and explorers, we only were able to contain the loss by shifting focus to the former. Moreover, there is a real carnage going on among early-stage penny stock explorers. The main conclusions of the October posting on junior miners and explorers lagging the majors still uphold:
  • Low gold price volatility is favourable for explorers,
  • Gold mining majors need to keep pace with precious metals rising,
  • Stock markets need not slump...
Gold price volatility creates more uncertainty over future cash flows of mining majors. As a result they are likely to be even more cautious when evaluating potential take over candidates among juniors and explorers.
Higher stock prices for precious metal mining majors facilitate a take-over paid for by issuing new shares. Finally, general stock markets flourishing makes raising capital less dilutive for explorers. Emerging producers will meet less problems in financing the capex for their mining start-ups.
Let's face it: none of the above conditions are met, which makes me wary over the near future of explorers.

Further reading:

Esp. the links in "Picking throught the rubble of juniors".
More blog articles on gold mining fundamentals and tactics linked to in the top section of the Directory of Posts.

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