It’s All About Price for Gold Mining ETFs

September 24th at 8:00am by Tom Lydon

On Monday, the Market Vectors Gold Miners ETF (NYSEArca: GDX) and the Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ) lost 2.3% and 1.9%, respectively. With those losses, GDX and GDXJ are now trading well below their pre-no tapering announcement levels and with the loss of Federal Reserve momentum, the focus on mining ETFs returns to price.

As in the price of gold futures and at what point do the companies that are found in ETFs like GDX start to feel pain because of falling bullion prices. Gold is once again flirting dangerously close with the $1,300 an ounce level, an area at which questions previously arose regarding the ability of even some of the largest miners to profitably extract gold from the earth. [Gold's Bounce Inches Some Miners Back to Profitability]

On Monday, Citigroup raised its price target on gold to $1,248 per ounce from $1,143, but that revision is still below where bullion currently resides. It is also price where some miners may not profitably be able to pull gold from the ground. Citi also raised its price target on Barrick Gold (NYSE: ABX) to $22 from $20, its target on Goldcorp (NYSE: GG) to $29 from $28 and its target on Kinross Gold (NYSE: KGC) to $5.90 from $5.80, Barron’s reported.

Goldcorp and Barrick combine for almost 26% of GDX’s weight. Last week, Credit Suisse had this to say about Eldorado Gold (NYSE: EGO), which carries a 4.6% weight in GDX:

“EGO is well set up to weather a lower gold price environment with lower than peer average all-in sustaining costs at $950/oz in 2013; a strong balance sheet with $744M in cash, a $375M undrawn credit facility and $600M in LT debt due in 2020; and strong operations with 2013 guidance tightened to 745koz at $520/oz cash op. costs, the middle upper end of original production guidance. In H1/13, EGO produced 47% of production guidance at $492/oz cash op. costs, according to a note posted by Barron’s.

Not all outlooks for gold miners in the event of further gold price declines are positive. Last month, Cowen & Co. said Kinross and Agnico-Eagle (NYSE: AEM) would suffer low or negative profitability even with a $100-$200 gold-price decline. Those stocks combine for nearly 9% of GDX’s weight. However, Cowen also noted Goldcorp and Yamana Gold (NYSE: AUY) would still be to generate positive earnings amid significant gold price retrenchment. 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. [30% Plunge Could Mean Disaster for Gold Mining ETFs]

Market Vectors Gold Miners ETF

ETF Trends editorial team contributed to this post.

 

 

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.

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