Gold miners’ shares have fallen over 50% since the beginning of 2013, back to the level reached in the aftermath of Lehman Brothers’ collapse in 2008.
Although gold miners have historically tended to trade at a substantial premium to the broader mining industry, their valuations have now fallen substantially below that of most other equity sectors including the materials sector.
While the bottom of the de-rating might not have been reached yet, we believe that most of the write-offs have already been reflected in market valuations. Current depressed share price levels appear attractive to begin to build positions in gold mining stocks.
Gold Miners Might Have to Write Down Their Assets
With gold bullion slumping into a bear market, gold miners might be forced to write down the value of their assets by year-end. Newcrest, one of the top ten gold producers, has already announced it will reduce the value of its mines by as much as US$5.6bn, after having lost half of its market capitalization since April 2013.
Other miners are expected to follow Newcrest’s steps when they report annual results, as most companies valued their reserves assuming a gold price of US$1,300oz or higher. Gold miners will be reporting earnings over the next four weeks. While some write-downs are likely, downside appears limited given recent sharp share price moves down, opening up opportunities for investors to begin to accumulate positions.
Miners are Trading Below their Book Value