Earlier this year we reported on the impressive returns that were being produced from a stock screen that allows you to see which companies are attracting favourable upgrades from brokers. The Earnings Upgrade Momentum screen has continued to outperform the FTSE so far this year and one of the interesting current patterns is that half of the 10 qualifying companies are gold mining stocks. So called "earnings upgrades" – when analysts revise their expectations about a company’s performance – can be a significant indicator for individual investors. Indeed, while relying too heavily on the opinions of analysts can be a risky business, these upgrades have been shown to be a fairly influential guide to the future.
How the screen works
As a reminder, this screen works by seeking out stocks that are covered by more than three analysts. Thereafter, each company’s earnings per share estimates for the following year should have been increased by more than 5% during the previous month. In addition, there must have been at least one upgrade during the previous month, and the number of upgrades must be higher than the number of downgrades.
At the height of the financial reporting season in March this year (when the market hit a 2012 high of 5,966 points), the screen was the best performing Stockopedia strategy. Among the companies qualifying at the time were paper and packaging group Mondi (LON:MNDI) and media company Itv (LON:ITV). Both were hit by the market-wide volatility that struck in early summer but have subsequently recovered and are now trading close to their 1-year highs. By contrast, Max Petroleum, a small-cap oil and gas stock on the screen back then, went on to see its price collapse under the weight of poor news from its operations in Kazakhstan. That illustrates the importance of doing further analysis and/or using diversification when screening, rather than just pickling one name blindly from a list.
In the year-to-date, the Earnings Upgrade Momentum screen has produced a return of 15.9%. The list of stocks qualifiying changes every day although we rebalance our model portfolio each quarter. Interestingly, out of the 10 now qualifying companies, six of them are mining stocks – and five of those have a strong emphasis on gold production.
Why gold now?
Between October 2008 and August 2011, the price of gold surged from around $715 per ounce to a high of $1,890. Many analysts thought the price would go on to break $2,000 but during the second half of last year gold became volatile and went on to fall to $1,550. However, since mid-August the price has been on the march again and gold currently trades at just short of $1,750. Analysts have credited much of that performance to anticipation surrounding the US Fed’s decision to launch a third round of quantitative easing. The price ‘pop’ from the Fed’s move has been more muted than on previous QE rounds, but some institutions think the price will go on to trade much higher. BlackRock’s Evy Hambro has been reported as predicting $2,400 per ounce by next summer, while Deutsche Bank’s forecast for next year is $2,113.
For mining companies that are producing increasing amounts of gold, this recent increase in the price can only mean good news – and the brokers seem to agree.
The top qualifying gold production share on our Earnings Upgrade Momentum screen (based on FY2 EPS upgrades) is also the smallest stock on the list. Amara Mining (LON:AMA), which changed its name earlier this month from Cluff Gold, makes its money from the Kalsaka gold mine in Burkina Faso, which is expected to produce 60-70,000 ounces of gold in 2012. The addition of the neighbouring Sega project should maintain that production profile over the medium term, while the development its Baomahun project in Sierra Leone is expected to contribute an additional 135,000 ounces of gold per year starting in 2014.
Centamin (LON:CEY), which runs the Sukari Gold Mine in Egypt, has seen its shares jump by 30p to 104p during the past two months. While operations were hit by strike action and technical glitches over the summer, Q3 production was up by 20% to 60,922 ounces and the company is on course to hit its full year target of 250,000 ounces. While Centamin continues to explore around its Sukari project, exploration drilling is also under way on the first of four licences the company holds in Ethiopia.
Fresnillo (LON:FRES) is the largest stock on the Earnings Upgrade screen and it too has enjoyed some strong momentum in its shares since the end of the summer. While Fresnillo is the world’s largest primary silver produce it also has major interests in gold. The company recently reported that it was having a record year for gold production – up 15.1% to 375,637 in Q3 on the same period last year. At the full year, the company is expecting to have produced 41Moz of silver and 460,000 ounces of gold.
Another of the gold mining large caps is AngloGold Ashanti (LON:AGD), which beat its Q2 production guidance with 1.07Moz following strong performances at its mines in Continental Africa and the Americas. AngloGold Ashanti has nearly tripled its EBITDA since introducing a new operating model in 2008. It is now focusing on increasing production through the development of projects including the expansion of the Cripple Creek & Victor mine in Colorado, the development of the Kibali and Mongbwalu mines in the Democratic Republic of Congo and the new Tropicana mine in Western Australia.
Wrapping up the list, Russia’s largest gold producer Polyus Gold International (LON:PGIL) has also attracted attention from analysts. The company has just released figures for the first nine months of the year, with 2012 production outlook reconfirmed at 1.6 million ounces. Much of the Polyus’s recent price performance is down to a strong set of half-year financial results at the end of August, when it said that profits had more than doubled to US$426 million. The company has also raised the possibility of a potential offer for the company should Onexim – a 37.78% shareholder – act on an announcement that it may sell some or all of its holding.
A great time for gold stocks?
Bullish markets and ‘easy money’ economic stimulus have proved to be a boon for gold production stocks since the summer. Companies catching the eye of analysts - and making it onto the Earnings Upgrade Momentum screen - all have strong production profiles, they are seeking to increase output and have pipelines of new mines and exploration projects on the horizon. For the investor, the stability of the gold price is a constant uncertainty, likewise quant analysis is just one step in the overall investment process. Nevertheless, this type of screen sheds some fascinating light on the stocks and sectors which could be capitalising on the prevailing economic conditions – and gold producers seem to be well placed.
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