With the SPDR Gold Shares (NYSEArca: GLD), the world’s largest ETF backed by physical gold, down nearly 24% this year, further significant retrenchment in gold prices may be a hard concept to fathom for some gold bugs.
As it is, with gold prices struggling to stay above $1,300 per ounce and move higher from there, profitability for some miners is threatened. Below $1,300 an ounce, speculation intensifies that even some of the large-cap miners will have a hard time profitably extracting the yellow metal from the earth. [ETF Chart of the Day: Gold Miners]
Imagine a gold prices at $900 an ounce, a roughly 30% decline from current levels, and the adverse impact that could have on gold miners and ETFs such as the Market Vectors Gold Miners ETF (NYSEArca: GDX). Analysis by Cowen & Co. indicates that some of the large-cap gold miners will be able to keep their heads above water “until 2015 in the event of an average gold price of $900,” reports Brendan Conway for Barron’s.
The Cowen analysis takes into consideration what the research deems “net solvency” for miners, a combination of cash on balance sheets, free cash flow, and available credit, extrapolated two years into the future, Barron’s reported.
The analysis highlighted Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM) as two companies that currently have strong net solvency positions. Those are GDX’s second- and third-largest holdings, combining for 20% of the ETF’s weight. Both companies recently cut their dividends in an effort to conserve cash. [Gold Bounce Inches Some Miners Back to Profitability]
Cowen also noted Goldcorp (NYSE: GG) and Yamana Gold (NYSE: AUY) would still be to generate positive earnings amid significant gold price retrenchment. Those stocks combine for 19% of GDX’s weight. Yamana’s all-in-cash costs are below $860 an ounce, indicating the company could still be profitable if gold trades only slightly above $900.
However, Cowen said Kinross Gold (NYSE: KGC), another recent dividend cutter, and Agnico-Eagle (NYSE: AEM) would suffer low or negative profitability even with a $100-$200 gold-price decline, according to Barron’s. Those stocks combine for 9% of GDX’s weight. Kinross is believed to have all-in-cash costs of around $1,040 per ounce.
Market Vectors Gold Miners ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of GLD.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.