By Chris Taylor
NEW YORK, July 31 (Reuters) - The scary movie "The
Conjuring" may be a winner at the box office this summer, but on
Wall Street the real horror show is the gold mining sector.
And the numbers have been as grisly as any low-budget
The Market Vectors Gold Miners ETF stands below $27,
producing a year-to-date slump of more than 40 percent. Major
producers like Barrick Gold Corp and Newmont
Mining Corp sputter near 52-week lows, and the sector's
average price-earnings ratio - a common measure of valuing
stocks - is about 75 percent below its 10-year average,
according to London-based ETF Securities.
After one of the strongest bull runs in stock market
history, with the Dow Jones Industrial Average up roughly
150 percent from its March 2009 lows, apparently cheap
valuations in gold stocks are hard to come by these days.
The sustained punishment in the stocks is not without
reason. The falling price of gold - it stands near $1,315 an
ounce, down from a high of over $1,900 in August 2011 - has made
the industry's economics very tough indeed.
But some analysts wonder whether we have seen the worst and
better days might be ahead for beleaguered gold miners. Hedge
fund manager David Einhorn of Greenlight Capital, for example,
said this week he is buying gold mining stocks.
"The numbers are so bad that they're good," says Carter
Worth, chief market technician for New York-based boutique
investment adviser Oppenheimer & Co. "There was euphoria at the
high, when gold was $1,900 an ounce, and now there is total
Since the entire sector has been whipped, Worth says it's
futile to identify individual bargains amid the wreckage.
Instead, he advises spreading the risk by sticking to
exchange-traded funds like Market Vectors Gold Miners or SPDR
Dangers abound. Since the industry is highly
capital-intensive, many miners have loaded up on debt to help
fund operations and launch new projects. That leaves them
vulnerable in times of falling gold prices, economic contraction
that crimps demand, and rising borrowing costs.
To avoid falling knives, Rick de los Reyes, a metals and
mining analyst for Baltimore-based fund shop T. Rowe Price
, suggests focusing on names that are not locked into
massively expensive projects and have operating costs well below
the industry average.
His favorite: Eldorado Gold Corp. The
Vancouver-based firm has gold properties in Turkey, China,
Brazil, Greece and Romania. It has net cash on its balance sheet
and enjoys flexibility about which projects to push or table
until the outlook for gold improves.
On the flip side, de los Reyes urges caution regarding
Barrick because of its high debt levels - more than $14 billion
in long-term debt at March 31 - along with a pricey menu of
projects. Pascua-Lama on the border of Argentina and Chile, for
instance, has been plagued by delays and cost overruns, with
billions already sunk into development.
"They are in big trouble if the price of gold goes lower,"
de los Reyes says. That helps explain the stock's anemic forward
price-earnings ratio of less than 7, despite an alluring
dividend that has risen above 5 percent.
Another strategy to tamp down risk: Look to gold royalty
companies, which own a piece of mine production without taking
on operational costs. In exchange for upfront capital, they lay
claim to an ongoing income stream generated by projects around
the world. Such companies include Franco-Nevada Corp,
Royal Gold Inc and Silver Wheaton Corp.
Don't expect an immediate turnaround in the fortunes of gold
miners, though. Investors like clarity, and for gold miners,
there is very little right now.
In their accounting, mining companies have to make certain
assumptions about the price of gold. When it falls
significantly, they have to go back to the drawing board and
figure out which projects still make financial sense, and which
"That process is going to take time," says Alec Kodatsky, a
Toronto-based mining analyst for CIBC World Markets. "The
upcoming quarter is going to be very important for that, but
until then, people are going to remain on edge."
When sentiments do turn, though, gold mining equities could
be a "very interesting place to be," Kodatsky says. His prime
pick: Goldcorp Inc, whose portfolio includes mines in
Canada, the United States, Mexico and Argentina. While trading
at a premium to some others in the group, its growth prospects
stand out in an industry where mines get depleted of their gold
Meanwhile, he cites Kinross Gold Corp and Newmont as
two stocks that could be underperformers because their playbooks
may have to be rewritten if the price of gold does not rebound.
Even with so much carnage, Oppenheimer's Worth sees
opportunities in the sector. "Everyone has been destroyed, so if
you buy them now, there is limited downside if you are wrong,"
he says. "But if you are right, there could be a whole lot of