For Gold Miners, Another Terrible Run

Nathan Vardi Forbes Staff

http://www.forbes.com/sites/nathanvardi/2014/11/10/for-gold-miners-another-terrible-run/

For years, the gold mining sector has been the worst investment sector imaginable. There was a while in 2014 when it seemed like the gold mining sector might avoid another disastrous 12-month stretch, but that seems unlikely after what has taken place in financial markets in the last few weeks.

With gold trading down to $1,149 an ounce, the companies that try to extract the yellow metal from the ground got hit hard yet again on Monday. The Market Vectors Gold Miners ETF fell by 6.3% and is now down by 17% in 2014. The gold mining sector has pretty much been the worst investment sector for the last three years.

Some prominent investors rallied behind an investment thesis that focused on gold miners in the years following the financial crisis, viewing the sector as the perfect antidote to currency instability and national governments run amok. As the price of gold spiked in 2011, gold mining companies borrowed billions of dollars and spent tens of billions of dollars more on ambitious new projects and ventures. As the price of gold has fallen, many of those projects have become uneconomical and caused a cash crunch that has rippled through gold mining companies, both large and small.

Barrick Gold, the world’s biggest gold mining company, has remained a strong example of what has gone wrong. Shares of Barrick fell by 6.7% on Monday and are now down by 36% in 2014.

The vast majority of Barrick’s revenue comes from gold mining operations. With some $10 billion in net debt, Barrick has not been able to reduce its debt-load in any meaningful way as the price of gold has plunged. Its 2011 purchase of Equinox Minerals for $7.4 billion did not work out and construction on its key and half-built Pascua-Lama gold project on the Chilean-Argentine border remains temporarily suspended after environmental and legal delays.

“With the project not just vying for social acceptance in Chile (and regulatory approvals on water), but also contingent on more robust project economics, the uncertainty is heightened,” Deutsche Bank recently said in a research note. “Management’s target net debt of $7bn, conveyed on its 3Q14 earnings conference call, is a tall order without a combination of a higher gold price and asset sales.”

In 2014, the gold miners have yet again continued to underperform gold itself, which is down a relatively modest 4% in 2014. Gold miners have now underperformed gold—through both good times and bad—in nine of the last 13 years.