Gold's turn to glitter

Is 2015 the year that gold mining shares will finally make an upturn?

Shares of gold mining companies, many Canadian-based, have suffered underperformance for several years. Gold the commodity just finished two years of back-to-back price declines. But since December 31 2014 the sector’s future has brightened. The price of gold made a surprising move higher, given the strength of the US dollar. In fact, in terms of the Euro and the Canadian dollar as well as most other currencies gold’s gains have been spectacular. Along with the gold price the share prices of some well-known mining equities are turning higher, from a very low level.

For example, three highly regarded Canadian mining companies are soaring year-to-date; Agnico-Eagle up 38%, Goldcorp up 36% and Eldorado Gold up 33%. These are the gains to January 21, just three weeks into the year. Compare these gains to base metal producers such as Sherritt, down 29%, Teck down 8% and Rio Tinto down 4% and you get the idea of how unusual this is. And of course, the Canadian energy sector is down 7%. The S&P TSX is down about 1.7% year-to-date as I write.

So what’s changed in the last three weeks to ignite this burst of new buying pressure?

Well, as far as the gold mining shares are concerned they are as a group one of the biggest users of petroleum-based energy. Gold mines are in remote locations and often the only way to generate power to run the mine and the processing plant is a diesel generator. This is very expensive when WTI is $100. Also a lot of supplies, including the fuel, are flown in by helicopter.

According to Credit Suisse gold companies are poised to increase profit margins from the 10% trough in 2013 to 14% in 2015 and 17% in 2017. Over the next couple of years these companies will reap the benefits of their very hard work done in an effort to be cash flow positive at $1,200 per ounce. Of course if the gold price soars back to $1,800 per ounce the ball game will change dramatically as the operating leverage at the company level is enormous.

Fasten your seatbelts and get ready for the excitement in this under-owned and under-appreciated sector.