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ETF News And Commentary

Many investors were very bearish on the gold mining space to start this year thanks to QE taper, strength in the greenback, falling demand from the key consuming nations like India and China, as well as investors’ inclination toward high growth sectors of the equity markets. In fact, the space was crushed in 2013, having witnessed as much as 55% price decline.
 
Though the space proved the world wrong and moved on to embrace smart gains in the beginning of the year helped by a series of geo-political concerns, the worries over the sector are still looming large. At least Q2 earnings delivered by some sector large caps give such cues, and could help give a roadmap for the second half of the year.
 
Three gold mining companies Barrick Gold Corporation (ABX - Analyst Report), Newmont Mining Corporation (NEM - Analyst Report) and Gold Corp. (GG - Analyst Report) came up with mixed results this season. NEM reported on July 29 followed by ABX on July 30 and GG on July 31 (read: A Comprehensive Guide to Gold Mining ETFs).
 
Newmont’s Q2 Earnings in Focus
 
Newmont’s second-quarter 2014 adjusted earnings were 20 cents per share, way better than a loss of 18 cents recorded a year ago thanks to efficient cost management. Gold and copper costs applicable to sales were down 16.9% and up 66.7%, respectively, year over year. The results were in line with the Zacks Consensus Estimate.
 
Revenues fell about 12.5% to $1.77 billion in the quarter and fell shy of the Zacks Consensus Estimate of $1.84 billion. The company raised its production guidance marginally. Following the earnings announcement, the stock has fallen 2.47% (as of July 31, 2014).
 
Barrick Gold’s Q2 Earnings in Focus
 
Barrick Gold’s adjusted earnings plunged about 79% to 14 cents per share but were in line with the Zacks Consensus Estimate. Lower pricing and volumes for both gold and copper can be held responsible for the slack earnings.
 
Revenues fell 24% year over year to $2.43 billion in the reported quarter and also missed the Zacks Consensus Estimate of $2.48 billion. Average realized price of gold declined 8.6% while gold production dropped to 1.5 million ounce from 1.8 million ounce a year ago. Here also, cost containment was the tool to survive in a turbulent market. All-in costs declined 25.4% in the quarter (read: After a Rocky Q1, What's Ahead for Gold Mining ETFs?).
 
Following earnings, the stock fell 2.11% as of July 31, 2014. The stock continued losing in after-hours trading also.
 
Goldcorp’s Q2 Earnings in Focus 
 
Gold mining giant Goldcorp’s adjusted earnings of 20 cents per share for the second quarter beat the Zacks Consensus Estimate and improved from the year-ago earnings of 14 cents a share. Its revenues grew 3.8% to $1.12 billion and beat the Zacks Consensus Estimate of $1.06 billion.
 
Gold production inched up less than 1% in the quarter while average realized gold price slipped 4.6%. All-in sustaining costs plummeted 30.6% in the quarter under review. Following the earnings release, Goldcorp shares have shed 1.23% though the stock has added about 0.1% after hours on July 31.  
 
ETF Impact
 
All the aforementioned companies have considerable exposure in large-cap funds like Market Vectors Gold Miners ETF (GDX), iShares MSCI Global Gold Miners (RING) and PowerShares Global Gold & Precious Metals (PSAU) (read: New Smart Beta Gold Mining ETF Hits the Market).
 
For PSAU, GG, ABX and NEM take the top three positions, respectively, and combine to make up about 23% of the total assets. Within just two-days (as of July 31, 2014), PSAU lost about 3.8%. RING also maintains the same allocation order. As much as 32% of RING goes to GG (16.22%) and ABX (15.46%) while NEM gets 8.7% allocation of RING. NEM retreated about 2.5% in the same trading session.
 
For GDX also, GG, ABX and NEM take the top three spots with a respective share of 13.7%, 12.9% and 7.7%. GDX lost about 3.2% in the last two trading sessions but added about 0.1% after hours on July 31.
 
Bottom Line
 
The crux of the discussion is that the recent downfall in share price for much of the space, in the wake of mixed earnings and a not-so-enthusiastic outlook, will set the tone for gold mining ETFs.
 
With the U.S. economy finally gathering steam and having progressed at the rate of 4% in Q2, a sooner-than-expected rise in interest rates has now become the talk of the town, though the Fed has repeatedly asserted that it will provide support as long as the economy needs.
 
Also, a reiteration of 10% import duty on gold in India – one of the biggest importers in the world – will keep the demand muted.  Earnings results are also reflective of such issues. Hence, investors need to be vigilant over the gold mining ETFs’ price momentum in the days to come before jumping in to the space. The space has some positive drivers too including policy easing in Europe, moderation in production hurdles and stabilization in another top consuming nation, China.


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