Friday, 28 September 2012

Gold explorers have a long way to go

Several gold explorers have popped and some have doubled (or even more). Does this mean the best days already are behind us? Not quite. If some gold explorers put down a stellar rally over the last few weeks, this mainly is some recovery after the dire malperformance during the preceding months, when explorers were sliced and diced, leaving investors with a couple of dimes on the dollar.

It is illustrative to check how GLDX, the Global X gold explorer ETF has fared relative to GDX, Van Eck's major gold miners ETF.

GLDX, the Global X gold explorer ETF relative to  GDX, daily observations YTD
Click to enlarge
The GLDX focuses on a wide segment of small caps to mid-caps among gold and silver explorers. They don't invest in early stage explorers with a market capitalization of $20 M (or less). The picks in there are the likes of Kaminak Gold, Seabridge gold or Pretium Resources. You can check out the current composition at: http://www.globalxfunds.com/GLDX. Some of these explorers upheld better during the downturn than most of the microcaps. On the other hand, there is perhaps less hope for a miraculous recovery.
Anyhow, it is obvious that GLDX lost over 20% more than did GDX since the February gold recovery was made to falter on leap day.

You might think this rather was an unusual and temporary poor performance of explorers relative to producing miners. Think twice: below you find an extended graph since November 2010, when GLDX was launched. Relative to major gold miners, explorers are now priced at barely more than half their early 2011 value.

GLDX, the Global X gold explorer ETF relative to  GDX, weekly observations since launch
50 dma and 200 dma are emulated using 10 weekly and 40 weekly moving averages
GLDX outperformed GDX during the first few months after it was launched. Yet, the explorer rally faded and despite gold rallying to an all time high early September 2011, explorers steadily lost track of where miners were going, even leveraging down the decline of gold mining majors during most of the downturn. The June recovery of miners brought little relief, but explorer valuation did slide back as miners turned south to make a secondary bottom in July. We have seen some recovery (explorers finally picking up) from mid July towards the end of August. Yet, as the QE3 perspective started the miners rally, explorers seem to follow reluctantly, prone to several swoons in relative valuation.

Acquisitions over the last year have not been very numerous and most of the targets were bought out on the cheap. Think of Silvermex/Genco and Extorre Gold, to name a couple. As gold mining majors gradually exhaust reserves, they will need to look around for more acquisitions. The price per ounce for resources that can be turned into profitable mines will soar... and so will the stock price of the explorers or junior miners which own those resources.

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