Published February 04, 2013

Gold Miners: Growth vs. Performance

Dear Reader,

Gold reacted to negative employment and GDP numbers last week, showing that the safe-haven metal is still serving its purpose. But what about the gold miners – why has their performance been so dismal? Andrey Dashkov has some answers below.

Remember: it's when no one wants something of value that it's the best time to "buy low."


Louis James
Senior Metals Investment Strategist
Casey Research

Rock & Stock Stats
One Month Ago
One Year Ago
Gold 1,662.00 1,675.80 1,749.50
Silver 31.35 30.23 33.81
Copper 3.73 3.65 3.84
Oil 97.49 91.82 97.61
Gold Producers (GDX) 42.22 46.39 56.56
Gold Junior Stocks (GDXJ) 19.15 19.79 29.80
Silver Stocks (SIL) 21.08 22.65 24.89
TSX (Toronto Stock Exchange) 12,768.83 12,433.53 12,517.66
TSX Venture 1,228.66 1,221.30 1,637.31

Gold Miners: Growth vs. Performance

By Andrey Dashkov, Research Analyst

We often hear the claim that gold producers have not met investors' expectations for the past couple years. While there are many potential reasons for this, one explanation for their underperformance lies in the fact that producers diluted their share structures, leaving shareholders with smaller gains than they would have otherwise harvested.

To show how this dilution has impacted the industry, let's first review how gold miners performed last year compared to the S&P 500.

(Click on image to enlarge)

The chart is hardly a surprise: the precious-metals producers had a poor showing, losing 26.6% in 2012 – something we think will reverse this year – while stocks in the S&P 500 delivered a solid 14.2% annual gain.

We think that while last year's performance of the S&P 500 companies is commendable, the future may disappoint investors who believe the US economic recovery is on solid footing: last week's GDP data suggest that our economy continues to struggle, something that was immediately reflected in the price of gold the day the news was released. As 2013 progresses, we expect to see more signs of a weaker economy and subsequently, stronger gold prices.

But let's look at the bigger picture to see how the S&P 500 has expanded as a group during the past decade. To measure the rate of expansion, we plotted the total market capitalization against growth of shares outstanding. The idea here is to compare the rate of S&P 500 share dilution to the change in size of the companies. Size does not equal performance (we'll look at that in a moment), but it gives a rough idea about how much market value investors may have gained had there been no dilution at all.

(Click on image to enlarge)

[Technical note: We did not include all S&P 500 companies in the above chart – only those for which share structure data was available since the first quarter of 2003. For example, Google went public in 2004 and was not included. We followed the same method with the HUI Index, with the only stock excluded being New Gold Inc. (T:NGD).]

Since there is little growth in shares outstanding, the majority of the market capitalization (Mcap) growth can be attributed to share price performance.

The total Mcap of the S&P 500 increased by 78.6%, or about 6% per year on a compounded basis. And no wonder – the sector includes a lot of large stocks that do not grow at the same rate as mining juniors. However, the chart also shows how quickly market value can shrink when a crisis hits.

Let's now have a look at what happened to the HUI constituents within the same time frame.

(Click on image to enlarge)

There are two observations to be made from these charts. First, compared to S&P 500 companies, gold producers grossly overissued new shares. Since 2003, as a group, they more than doubled their shares outstanding, significantly diluting existing investors.

Second, despite the large increase in shares outstanding, HUI companies have grown their market capitalization by 302.5% as of the fourth quarter of 2012, quadrupling the size of the group. This comes in stark contrast to the 78.6% growth of the S&P 500. On a compounded annual basis, gold companies grew at 14.9% annually for the last ten years, more than twice as fast as the S&P.

So while shares outstanding of the gold miners were increasing at a high rate, the market capitalization of the HUI constituents outpaced the growth of shares outstanding, because the assets miners purchased with the funds they received from the new shares generated extra value. Since market capitalization doesn't necessarily expand when new shares are issued, it's the price performance that accounts for this growth.

Looking at the next chart, you can see that the performance of gold stocks continues to be both stronger and more volatile than the S&P 500. Note that we didn't modify the indexes here – these are the performance numbers that investors have been looking at for the past decade, and they make the case that the gold-mining sector has been far from lackluster.

(Click on image to enlarge)

The gold-mining sector has been outperforming the S&P 500 for the vast majority of the last decade.

While the difference in performance between the HUI and S&P 500 is easily visible, the gold-mining sector is currently facing a challenging time. It can no longer grow at the pace it has in the past – mainly because the investors who demanded higher production numbers several years ago have seen the adverse effects of issuing shares to finance that growth. Now the focus is on efficiency and economics, and rightly so.

While the sector readjusts itself to meet the demand of its shareholders, your Casey metals team continues working hard to bring you only the best of the best from the industry. There are producers with outstanding management teams and great assets that are on sale; tomorrow's new issue of BIG GOLD recommends a new company that meets these criteria so well that we're making it an immediate Best Buy.

Gold and Silver HEADLINES

Mining in Canada's North Expected to Nearly Double by 2020 (

The Conference Board of Canada expects mining in Canada's North to double both output and employment by the end of the decade.

Canada is acknowledged as a top mining jurisdiction, and the country has kept this status for many years. However, to remain at the top of the mining world will require that some issues be addressed by government officials, local communities, and mining companies, such as infrastructure challenges, regulatory uncertainty, skill shortages, and Aboriginal rights.

"Mining is the future economic driver of Canada's North. To fully reap the benefits of this potential, we must find the right balance between risk and opportunity. … Many northern and Aboriginal regions continue to worry about the effects that mining projects may have on their lands and on the environment. Such issues can only be resolved through dialogue," said Anja Jeffrey, director of the CBC Centre for the North.

Gold Imports Soar in India as Wedding Season Approaches (Mineweb)

Gold is vital to the Indian population, especially during the wedding season that starts in early February and continues until May. That's why bullion traders across the country imported considerable amounts of gold during first three weeks of January before the Indian government hiked customs duties. Gold imports soared by 15% to 75 tonnes in January.

Despite an 81% price hike in domestic prices, India's bullion imports rose to $56 billion from $21 billion between 2009 and 2012. This makes the government continue its harsh measures to curb demand.

Our view is that even the most severe attempts the government may take in regard to gold import duties won't be enough to prevent Indians from purchasing gold. They will, however, be a boon to black marketeers.

Swiss Banks Hike Charges to Store Gold in Their Vaults by 20% (

Swiss gold-market majors UBS and Credit Suisse have reportedly hiked their charges for holding the yellow metal – typically around 0.05-0.1% of the value –by as much as 20%. The change is caused by new banking rules that require greater capital reserves.

The news caused a stir among gold traders, as the new rules will help UBS and Credit Suisse to make their clients move to so-called "allocated" accounts from "unallocated" ones, which are the norm at the moment. Allocated gold accounts are better protected in case of bank failure, though they are generally more expensive.

Switzerland has always been a significant hub for physical gold storage, but this move will likely open up opportunities for rivals. As industry executives say, non-Swiss banks are considering building new vaults to take advantage of the changes made by UBS and Credit Suisse.

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