Gold miners should regain their shine – but choose carefully

Mining stocks lagged the gold price during the bull market and have struggled since. Dominic Frisby explains why and highlights some explorers with both short and long-term potential.

The first piece I ever wrote for MoneyWeek was about gold miners. It was in 2006. “Buy this stock here” I said, with the easy confidence of a young man in a bull market. “It’s 50 cents now, but it’s going to three dollars. As for that one there, it’s a dollar. It will be five dollars by next year.”

Every one of these claims, made so casually because I knew no better, proved true. I must have tipped six or seven different stocks. There were doubles, triples, five baggers and ten baggers. I recommended one company, Gold Resource Corporation, below $2.
The stock went up more than 15-fold to $30. Those bull market days are a long way away now. The bear emerged in 2011. In 2013 he took hold and, apart from six months of respite in 2016, he has refused to let go since.

Today, Gold Resource Corporation – one of the better companies in that it boasts producing mines and pays a dividend – is at $3.75. But that is one of the top performances. Many of the star companies of the 2000s do not even exist any more – some because they were taken out, others because they went to zero. Even the supposedly solid senior producers have been awful. Barrick costs C$16 today, 50% down on its 2006 price. Newmont sits at $32, when it was north of $40 12 years ago. Goldcorp touched $36 in 2006. This week it’s $9.

When you compare this performance with America’s benchmark S&P500, which has roughly doubled in the same time frame, the opportunity cost is just staggering. But what is perhaps most galling of all is that gold itself is also roughly double where it was in 2006. Today it sits at $1,225 an ounce. In 2006 it ranged between $500 and $720.

Why have miners missed the gold bull?

The received wisdom is that miners give you leverage to the yellow metal. If gold doubles, miners might triple or more. But this has not happened. You certainly get the leverage on the downside: when gold falls, the miners sell off by more. But the opposite has not occurred. The cumulative effect of this asymmetry is a situation where, even if gold is a lot higher than it was, the miners are a lot lower.