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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Monday, February 15, 2010

Can Gold Stocks Get a Little Respect?

Despite positive news expected on the earnings front, gold stock share prices could be volatile this week.

Gold producing stocks have been beaten down since mid-January, with the Market Vectors Gold Miners ETF ($GDX) sinking about 14 percent. Gold producing stocks backfilled what had been a 18 percent drop by climbing 3.6 percent during the past week, riding the wave of a weekly 2.3 percent gain for the yellow metal.

Four gold producers are scheduled to release earnings this week including IAMGOLD ($IAG), Agnico-Eagle ($AEM), Kinross Gold ($KGC), and Barrick Gold ($ABX). Based on earnings results already reported for many major gold miners, investors are expecting solid profits to be reported. But that may not translate into higher intraday prices on earnings release day or the near future for these companies based on recent experience.

Gold Stock Earnings Review

Gold producers that have already reported earnings have shown generally positive results for Q4 2009 largely on the strength of higher gold prices in the fourth quarter. Even so, stock prices declined on earnings announcement day.

On Thursday, February 4, South African-based Gold Fields ($GFI) announced a 44 percent gain in profits compared to the previous quarter. The bottom line boost for Gold Fields was driven higher by a rising gold price in the fourth quarter compared to the previous quarter. Shares of Gold Fields closed at $11.15 per share on February 4, down 6.7 percent for the day in response to the price of gold dropping 4.1 percent. Gold Fields also announced it was projecting lower gold production for Q1 2010 compared to Q4 2009, and Gold Fields CEO Nick Holland had to address investor fears that South Africa is considering nationalizing gold mines in the country.

On Monday February 8, African producers Randgold Resources ($GOLD), and Harmony Gold ($HMY) reported higher net income for the fourth quarter of 2009, based largely on a higher price of gold.

West Africa-focused Randgold announced record production for the quarter and a 14 percent production gain for 2009 over 2008. Annual earnings increased a stellar 79 percent, due to record gold production at its “flagship” Luolo gold mine in Mali, Africa. Despite the positive news, Randgold shares traded down 2.6 percent for the day as did Barrick Gold (-3.5%), Newmont Mining ($NEM) (-3.9%), Goldcorp ($GG) (-3.1%), and Yamana Gold ($AUY) (-4.3%).

After the closing bell on February 8, South African-focused Harmony Gold ($HMY) reported a 44 percent increase in operating profits despite a 1.2 percent fall in gold production. Harmony attributed the stronger earnings to a higher South African rand and lower cash costs. In line with a weaker gold price for the day, the company’s shares fell by $0.05, or 0.5%, to $9.41.

Ironically, good fourth quarter results were met with sell offs in the shares of Randgold, Harmony Gold, and Gold Fields.

Gold Stock Earnings Preview

In light of this experience, what can investors expect with Agnico-Eagle, Kinross Gold, IAMGOLD, and Barrick Gold as they report fourth quarter results this week?

On Wednesday of this week, IAMGOLD is scheduled to announce earnings before the market opens. A fourth-quarter per share profit of 16 cents is expected, up from 6 cents for the same quarter a year ago. IAMGOLD has announced plans to increase gold production to nearly 1 million ounces in 2010, up from 939,000 ounces in 2009. Uncertainty about IAMGOLD’s ability to meet guidance had increased with the announcement in early January that CEO Joe Conway would abruptly step down. The company has had great success recently at reducing costs and investors are looking for this trend to continue.

Agnico-Eagle reports after the market closes on Wednesday. Analysts expect fourth-quarter share profit of 25 cents, compared with a loss of 1 cent a year ago. More recently, Agnico-Eagle has experienced significant setbacks as they ramp up production projects to take advantage of record gold prices. Of particular concern are build out problems at the Kittila mine in Finland. The company reported a loss of 11 cents per share for the third quarter of 2009, disappointing investors. Despite solid analyst expectations, Agnico-Eagle could disappoint if expected higher capital expenditure requirements and higher operating costs for 2010 worked to diminish earnings in the fourth quarter.

Kinross Gold is also scheduled to announce earnings on Wednesday after the closing bell. Kinross’ consensus estimate is for a fourth-quarter profit per share of 16 cents, up from 9 cents a year ago. Kinross is also experiencing problems including harder than expected ore delaying expansion plans at its Paracatu mine in Brazil. Other projects are also seeing setbacks. Despite these problems, Kinross recently received positive news that China Investment Corp., a $300 billion Chinese sovereign wealth fund released information showing its largest position in gold stocks was $4.6 million in Kinross.

On Thursday, Barrick Gold reports before the market opens. Analysts are expecting fourth-quarter profit of 59 cents per share, up from 32 cents a year ago. Of all the major gold producers, Barrick is the most likely to beat estimates. Barrick remains a top pick in the Gold Stock Strategist newsletter. Announcing the removal of their fixed gold hedges on December 1, 2009 was a positive for Barrick. Since then, about one-third of company analysts have raised the company’s 2010 estimates. 2010 earnings are expected to surge about 25 percent over 2009. Moreover, Barrick has a recent tendency to report positive earnings surprises.

Of course, the macro environment remains uncertain with continued mixed economic news out of the United States: retail sales are up, the unemployment rate is down, while consumer sentiment is falling. Economists are forecasting a slow down for the U.S. economy in the second half of 2010.

Moreover, surprising news of a rescue package for Greece by other EU members could roil the euro, boost the dollar and drive gold lower this week. Officials are meeting today to work out the details of how the EU will address Greece’s debt problem.

Uncertainty also surrounds a surprising bank policy out of The People’s Bank of China (PBOC) last Friday. The Chinese central bank unexpectedly raised bank reserve requirements for the second time in 2010. Traders are digesting the impact of this event with commodities—including gold—trading in a narrow range today. Backlash from this hawkish move could lead to a further liquidation of dollar-denominated assets—including gold.

Uncertainty Reigns and Roils Gold Stocks

It is too early for gold stocks to move strongly higher given continuing sovereign debt problems in the euro zone and China's unexpected tightening of banking regulations in 2010. As a result, there seems to be more risk than reward in gold stocks for the next month and into the summer. Of course, emerging geo-political events in Iran, Afghanistan, and the Middle East add to the uncertainty of gold and gold stocks.

Uncertainty on the global financial scene could continue to roil the markets for gold and gold mining stocks. We could see a volatile ride up and down for miners of the yellow metal this week and over the next months, even with positive news on the earnings front.

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