29 July 2020

Mining the Gold Miners

See important disclaimer at the end of this article

With prices surging 32% in the last year vs. the USD (26% vs EUR), gold has certainly attracted attention from long term gold bulls and opportunistic investors. While most equity investors are not allowed to buy physical or paper (futures/ETF) gold, they can still ride the wave by investing in the gold mining sector all together or in selected names. In this article, we use Sismo’s analytical and data viz capabilities to show the general characteristics of the gold mining industry and provide some ideas for stock pickers based on different measures of valuation.

1. The list of Major Global Gold Miners

We created a list of the 21 largest gold mining companies by restricting the composition of the iShares MSCI Global Gold Miners ETF (ticker RING) to the North America and Europe regions. The list is largely dominated by Canadian companies (17 over 21).
2. Outstanding historical performance in tandem with gold
The chart below shows the total return of the equally weighted list of Major Gold Miners over the last 5 years. Had you invested 100USD in this list 5 years ago, your wealth would have been multiplied by … 5x !

This outstanding performance mirrors almost perfectly the evolution of gold prices over the same period. Gold miners appear as a (levered) play on gold prices. Implied leverage over this period is 5.7x (ratio of Major Gold Miners performance over Gold performance).
3. An asset class on its own
The price of commodity related companies can be more correlated to their base commodity than to the overall equity market. The Gold Mining sector provides a great illustration. In the distribution below, we show the 2-year weekly correlation of the largest 1,200 North America & Europe stocks to the MSCI World index. Highly correlated stocks stand on the right side of the distribution, low correlation stocks on the left. Highlighted are stocks from the Major Gold Miners list. Major Gold Miners show only little correlation to the overall market, showing an average correlation of only 0.23, compared to a universe average of 0.69.

4. Factor profile of the Major Gold Miners list
To get a synthetic view of the common characteristics of Gold Mining stocks, we calculated the exposures of the Major Gold Miners list to the Sismo Factors. For a full description of the Sismo Factors, please follow this link.

On the chart below, two versions of the Sismo Factors are displayed:

  • White line (“universe-z”) shows the average positioning of the Major Gold Miners list with respect to the overall universe of 1,200 stocks as of 24th July 2020. For example, the high reading on Sentiment means the Major Gold Miners list benefits from a very bullish sentiment from sell-side consensus compared to the overall universe
  • Red line (“history-z”) shows the positioning the Majors Gold miners list relative to its own 5-yr history. For example, the very high reading on Risk means that the sector is much more risky than its 5 year average (which is not surprising since recent volatility has been wild for the overall market)

What can we conclude from this chart?

  • Quality (profit margins/balance sheet): Gold Miners are as good as the overall universe but are slightly better than in the past
  • Risk (volatility/beta/skew): Gold Miners are also in line with the overall market. Keep in mind that the low correlation of the stocks means their betas is relatively low. On average, we see the Gold Miners volatility ~50% higher than the MSCI World
  • Sentiment (sell-side % buys& revisions, target price premium): the sector benefits from very bullish Sentiment from analysts. This Sentiment is also higher than its long time historical average.
  • Value (P/E, P/B): the Major Gold Miners list is slightly more expensive than the overall market and its historical average. However, by no mean do they appear to be overly expensive
  • Yield (Div Yield) : the sector is not known to pay high dividends which translates into a low Yield Factor
  • Growth (Sales & Net Income growth) : Gold Miners show strong growth, fueled by surging gold prices (and probably not by increased production)
  • Momentum (price action) : given their recent performance, it is no surprise to see the very high Momentum exposure of Gold Miners

In short, the Major Gold Miners list does not appear as overvalued despite the hype around surging gold & stock prices. Investors with a positive outlook for gold may still consider today as a reasonable entry point for the sector despite the recent run-up.

5. Ideas for stock pickers

For stock pickers willing to play single names, we provide the Major Gold Miners list sorted according to the two versions of the Sismo Value Factor (as of 24th July 2020):

  • First list (“universe-z”) shows the stocks with the lowest combination of price multiples. “Cheapest” stocks on top of the list
  • Second list (“history-z”) shows the stocks for which the combination of price multiples is low relative to their 5-yr history. “Cheapest” stocks on top of the list

If this note sparked some interest and made you think, we would love to hear your comments at contact@sismo.fr.

About Sismo

This study illustrates the analysis and visualization capabilities of Sismo, a visual analytics platform with direct web-access designed for discretionary equity portfolio managers that is integrated with European and US equity coverage from S&P.

Sismo combines innovative visualizations with advanced user interactions to facilitate the reading and understanding of market dynamics, select stocks, define and test investment strategies. It offers innovative screening and back-testing functionalities as well as investment style recognition and marginal portfolio optimization, leveraging on visual analysis capabilities to improve professionals’ investment decisions. Please visit www.sismo.fr.

Important Disclaimer :

Past performances are not indicative of future performances. The information in this article is provided for information only and does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell, or otherwise transact in any investment including any products or services or an invitation, offer or solicitation to engage in any investment activity.

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