Home > Stock Analysis

What's Ahead For Gold-Mining Stocks?

Posted: Jun 05, 2009 12:05 PM by Greg Sushinsky

Tickers in this Article: PCU, GFI, FCX, ABX, NEM

As Freeport McMoran (NYSE:FCX), the gold and copper mining stock, starts to grind its way up the price charts, moving from under the $20 per share mark in December, 2008, to just over $50 a share today, investors might wonder whether this is just a bounce off the bottom or whether it has anything to do with moves in gold. (Refresh your understanding of precious metals with our article: A Beginner's Guide TO Precious Metals.)

Get Free Stock Analysis By Email

IN PICTURES: 10 Ways To Prepare For Nature's Worst

When the Bubble Burst
As we wrote in March, the gold stocks have had their heads lopped off, many with 70% and 80% corrections. The bursting commodity bubble and the long run-up in stock prices has taken its toll. Freeport McMoran, despite its recent positive climb, is still way off its twelve-month high of more than $126 per share, so at $52.20 it hasn't exactly recaptured its glory.

An earnings falloff and a gigantic write down were the story with Freeport McMoran, as they posted a net loss of $13.9 billion, or $36.78 per share, largely due to a $13.1 billion write down of carrying assets from Freeport's acquisition of Phelps Dodge, the copper mining company that Freeport purchased in 2007. This put the loss for the year at $11.3 billion, or $29.72 per share. Freeport McMoran accordingly scaled back operations for this year and has shown the impact of the bursting commodity bubble, particularly on copper. Still, revenues for 2008 reached $17.796 billion, up from $16.9 billion in 2007.

Other gold miners were similarly affected, as Barrick Gold (NYSE: ABX) saw an earnings falloff, though not with the dramatic shrinkage of Freeport's. This is a case where diversification hurt Freeport, as its heavy exposure to copper mining saw the sheen come off that metal in '08 due to industrial slowdown, though copper is now back up to $2 a pound.

With the improved outlook for copper, there is talk that the gold majors such as Barrick and Newmont Mining (NYSE: NEM) may be going more deeply into base-metal mining to help their bottom lines and to fuel growth. Newmont has had its earnings flattened and has had some losing quarters, so such things naturally induce talk of the possibility of changing business approaches. Then again, altering the approach or the mix may not be necessary, as Gold Fields, Inc. (NYSE: GFI), the South African producer, is doing well in the current environment - posting strong results for the March 2009 quarter. The bloom for copper may not be anything special right now, either, as Southern Copper (NYSE: PCU) has had its high-flying earnings and stock price severely trimmed in the last year, and faces a long road back to recapture its former high levels of earnings.

The Bloat is Out
Still, there are many factors going forward which look positive for the gold mining stocks and the metal stocks. For one thing, the bursting of the commodity bubble took all the bloat out of stock prices, earnings and expectations. Now the metals producers are back to dealing with the cost of extracting the metals from the earth, and wrestling with mundane things such as cost controls, safety and profitability. But there is also TARP and all TARP-type things, which, even if the gold bugs' daily alarms about pending inflation are excessive, all this stimulus and government infusion is likely to cause the economic system to elevate to a very different interest-rate environment. That's a reasonable position and that's where gold comes in.

Is Gold Worthwhile?
Some additional factors, such as the wild card that is China, are developments that are more speculative or esoteric for most investors, yet worth noting. The traditional factors of U.S. Treasury spending, a weaker dollar, rising oil prices and the potential for domestic inflation, are something that every investor can understand, as well as trying amass less risky assets. Another reason why people might be buying into gold.

Gold Stocks Now?
All the gold stocks mentioned here had large run-ups last year and most have had mild run-ups recently, so tread carefully. Keep in mind that their stock prices aren't likely to blast into the stratosphere as readily this time around. The mining stocks are still a trade or investment on an actual business activity, the extracting of a tangible metal from the ground - maybe that image can keep the speculative impulses tempered. Profitable mining should steadily come back into the picture for these stocks, making them decent long-term investments as well as potential hedges, a nice investment double play. (Read 8 Reasons To Own Gold for an interesting perspective on owning gold.)

By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS