Despite the merger of two gold producing giants, gold miner stocks and sector-related exchange traded funds remained relatively muted in Monday action, potentially reflecting investor concerns for the industry.
On Monday, the VanEck Gold Miners ETF (NYSEArca: GDX) was up 0.1%.
Barrick Gold Corp. (NYSE: ABX) has acquired Rangold Resources (NasdaqGS: GOLD) for $6 billion in stock, the Wall Street Journal reports.
ABX shares jumped 6.3% and GOLD surged 7.2% on Monday in response to the merger. GDX includes a 7.0% tilt toward ABX and 4.4% to GOLD.
While Barrick and Rangold rallied on the deal, other gold mining companies did not join in on the celebration. The tepid response may be a reflection of Wall Street’s continued skepticism for a sector that has been weakened by flat gold prices and concerns that some miners overextended themselves during the gold bull market.
Gold Miners Continue to Trade at Cheap Valuations
The gold mining segment has not enjoyed the same level of strength as the broader market. Shares of some of the biggest U.S.- and Canadian-listed gold-miners are now trading at an average of 0.75 times net asset value, or 28% below where they were a year ago, according to Macquarie data for the U.S. and Canada show.
The price-to-asset value is a preferred measure for miners since the ratio takes into account variables like expected lifespan of mines and output. The measure is subjective and vary from analyst to analyst based on their individual assumptions.
A recent Bank of America report showed average price-to-NAV ratios were hitting levels seen only seen back in 2013, when gold prices plunged, in the 2008 crisis, and around 2000 and 2001.
Scotiabank also estimated that North American miners are trading at half the historical global average.
The ongoing cheap valuations in the gold mining sector may reflect the deep negative investment sentiment after investors got burned from years of disastrous acquisitions and overleveraged balance sheets in the mining space, along with more recent missteps including new mining projects.
Joe Foster, portfolio manager of the Van Eck International Investors Gold Fund, argued that North American gold miners are still trying to undo the reputational damage they caused during the mergers-and-acquisitions and development bonanza that led up to gold’s peak at near $1,900 back in 2011.
“All these companies during the boom years, they were building projects that didn’t generate good returns and blowing out their balance sheets and taking on too much debt,” Foster told the WSJ. “The companies were very poorly managed, and they really fell out of favor.”
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