Last year was particularly challenging for the mining industry as miners suffered heavy losses due to the slowdown in China and the subsequent crash in commodity prices. To stay afloat mining companies had to up the ante in their productivity efforts, while some found themselves fighting for survival, by disposing underperforming assets or closing operations.
This year, the mining industry seems to be on a better footing, having staged a comeback, with gold and silver being the major movers so far this year. Worries over the global economy, Brexit-induced volatile equity markets, the Federal Reserve’s (Fed) stance to maintain steady interest rates and the introduction of negative interest rates by several central banks boosted growth of these safe-haven assets.
However, on Oct 4, gold lost its bearing, slipping 3.3% to $1,266 an ounce. Prices came below the $1,300 threshold for the first time since the Brexit induced high in June. The plunge was triggered by higher-than-expected U.S. manufacturing data and the subsequent climb in the US dollar. According to the Institute for Supply Management, the ISM Manufacturing Index, which is a measure of production activity, stood at 51.5 for September, after a 49.4 reading in August. The upbeat data renewed the speculation that a rate hike by the Fed seems imminent this year.
Further, with Agence France-Presse reporting that the Deutsche Bank is close to reaching a settlement with the U.S. Department of Justice raised optimism and risk appetite among investors and lead major equity benchmarks upward. This took buying interest away from the safe-haven metal.
Silver followed suit slumping 5.8% in a day. The dips notwithstanding, prices of the yellow metal and silver are still up roughly 19% and 29%, year to date respectively.
All eyes are now on the much-anticipated monthly non-farm payroll report from the Bureau of Labor Statistics (BLS) on Oct 7. Weekly initial jobless claims have been steady and lower than historical averages of late, analysts are thus expecting a healthy jobs number at the end of this week.
However, as we are at the last quarter of the year, gold prices are seasonally stronger aided by retail demand for the metal, due to festival and wedding related buying activities in countries like India and China. Robust industrial demand and dwindling supplies for silver also sets the stage for silver prices to rise further.
As per the Zacks Industry classification, the mining industry is grouped under the Basic Material sector – one of the 16 broad Zacks sectors. Though sector growth will remain in the negative territory in the third quarter, a dip of 1.9% projected for the quarter is not that steep compared to the 11.6% decline witnessed in the second quarter.
However, a dramatic recovery is projected during the fourth quarter with an 18.2% growth. The sector will log growth of 4.8% and 8.5% in the first and second quarters of 2017 respectively. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)
Thus, a collusion of factors has prepared the ground for basic materials to win back the favor of investors after disappointing last year. It would be a prudent move to zero in on some stocks in the mining space right now that exhibit all signs of healthy prospects.
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Our research shows that stocks with a VGM score of ‘A’ or ‘B’, when combined a Zacks Rank #1 (Strong Buy) or #2 (Buy), offer the best investment opportunities for investors.
4 Prominent Picks
AngloGold Ashanti Ltd. (AU - Snapshot Report)
Headquartered in Johannesburg, South Africa, AngloGold Ashanti operates as a gold mining and exploration company.
AngloGold Ashanti sports a Zacks Rank #1, with a VGM Score of A. The Zacks Consensus Estimate for 2016 has moved up around 8% over the last 60 days. The stock has an impressive expected earnings growth of 368% for the current year.
ANGLOGOLD LTD Price