Fundamentals look good for mining companies

February 16, 2015 12:59 PM

For the most part, positive fundamentals (for gold mining companies) refers to rising gold prices. However, this neglects things under the surface that can affect margins as much as or more than headline prices.

In the chart below, we plot gold priced in canadian dollars; gold against oil; and gold against Industrial Metals. Before we get to the chart, let me explain why these ratios are important. First, the vast majority of gold mining firms are headquartered in Canada, with the loonie is their local currency. The Canadian gold price for firms that operate mines or explore in Canada can be more important than the USD Gold price because their costs are in Canadian Dollars and not US$’s. Thus, a weak loonie rather than a weak dollar is a benefit.

Second, the gold/oil ratio is important because mining is an extremely energy-intensive activity: energy costs can account for 25% of a miner’s costs.

The chart below shows that the gold price in Canada has surged while the Gold/Oil ratio has exploded. We also plot Gold against Industrial Metals as a proxy for other industrial related mining costs. That ratio has increased materially in favor of Gold but not to the degree of the other ratios.

As evidenced by GDX,  miners formed a strong double bottom and rebounded to the 400-day moving average which is key bear market resistance. The miners did not have that type of support at other lows (such as in June 2013 and December 2013). Moreover, the miners did not have improving margins thanks to plunging energy prices and a much weaker local currency.

The miner made progress in recent months but the bear market won’t be over until GDX can clear its 400-day moving average. The good news: miners formed a bullish double bottom after reaching arguably their second most oversold point (from a long-term sense) in the last 70 years. That was followed by the positive developments discussed above and word that the likes of Jeff Gundlach and Jim Rogers became investors in the sector. A new bull market lies ahead sooner rather than later but investors and traders need to maintain their discipline and patience. Consider learning more about our premium service including our current favorite junior miners which we expect to outperform.

About the Author

Jordan Roy-Byrne, CMT, is the editor and publisher of The Daily Gold. He can be contacted at Jordan@TheDailyGold.com.