13# Gold Miners Valuations key drivers: Gold Spot, 10 and 30 Year Yield Factors
Gold Miner Valuations
In the previous article, we had reached this point.
We can see very clearly that miners, quantified in gold, are very cheap. This is confirmed in the two main indices:
- NYSE Arca Gold Miners Index (GDM)
- NYSE ARCA GOLD BUGS INDEX (HUI)
Gold Miners Valuation: Correlations Between Gold Miners and Spot Gold
Looking at the correlation of the indices with the spot price of gold, we see that this correlation breaks between September 23 and March 24. From that date, the correlation resumes, returning to normal levels. Looking at the past, this is not the first time this disconnection has happened. In fact, previous instances have seen similar drops in correlation magnitude
Gold Miners Valuations: Micro Analysis of the Mining Sector
We generalize data to allow analysis of all companies in the sector. We know there are significant differences between them, different mining styles, capital structures, and synergies by size. Despite this, and due to the productive nature of the sector, there are common issues.
Duration of Cash Outflows/Inflows Mining Proyect.
Outflows
Inflows
- The duration, or weighted average time of payments/outflows, is 8.6 years.
- The duration, or weighted average time of inflows, is 16.2 years.
Factors Influencing Gold Miner Valuations
1 Spot gold price
10-year interest rate. It has a dual effect:
Inverse through the discounting of cost flows. A lower rate increases the present value of this payment flow. On the other hand, an inverse effect through its correlation with the spot gold price.
30 years interest rate: differs from the effects of the 10-year rate. These rates are used to discount revenues that have a much longer duration. Valuations are more sensitive to these rates than to the 10-year rate. Inversely correlated with the spot price.
*We use 10 and 30-year rates because they are the most popular. For an exact evaluation, one should use the rates of 8.6 and 16 years.
Spot Gold Price Impact on Gold Miners Valuation
Consolidated Cash Flows
Considering the entire useful life of a mining project (35 years), it starts selling the produced gold between year 9 and 30. The spot price does not affect project valuations outside of this productive period. Today, the correlation between the spot price and mining stocks is at historically high levels and continues to rise.
We recall that:
- Outflows have a weighted average payment time (duration) of 8.6 years and a modified duration of 7.67. Modified duration is simply a measure of the sensitivity of these flows to a 1% change in the interest rate. In this case, if the rate increases by 1%, this flow will change by 7.67%.
- Inflows have a duration of 16.23 and a modified duration of 15.45.
Consolidating both flows, the resulting total project flow has a modified duration of 15.2%. If rates decrease by 1%, the present value of the project today increases by 15.2%.
10-Year Interest Rate Impact on Gold Miners Valuation
Obviously, we have an inverse relationship via the discount rate for costs and the spot gold price.
Spot Gold and 30-Year Yield on Gold Miners Valuation
Positive relationship with the discounting of flows. Remember that we use it only to discount revenues.
Summary
- A clear, positive, and fairly constant correlation between the spot price and mining stocks.
- A permanently changing correlation between mining stocks and the 10-year rate.
- A permanently changing and more sensitive relationship between the 30-year rate and mining stocks.
In these three contexts, the correlation between gold and miners oscillates, or at least it should. Today, the disconnection between miners and gold is not based on the golds price but rather on the inverse connection that valuations suffer with rising rates. Let’s not forget that the real rates of 10 and 30 years were negative not long ago and have risen sharply since then. This held back the price of miners.
Until now.
Macro and Intermarket Analysis
As we saw here, the market has been assuming a defensive position for some time. The volume in the long end of the American curve (pension funds and similar guaranteeing long-term portfolio returns, as we saw here), the gold price at historic highs even with money market rates around 5%. Part of the market is paying an opportunity cost of 5% to shelter in gold. The race, from the moment the F.E.D starts cutting rates, is about to begin. Some are already positioning themselves, but most are still in the money market.
One ring to control them all: Rates
We saw this here
Technical Analysis
10-Year Rate:
30-Year Rate:
From a technical standpoint, these charts imply a significant decline in 10 and 30-year rates.
From an intermarket standpoint, this implies rallies in long-term bonds in the first step.
If we see the current situation of short-term rates, with a first cut already priced in by the markets for next September, we also have other clear destinations. All non-yielding assets have a lower opportunity cost.
Gold Miners Valuations benefits in this scenario.
Gold Miners Valuations:
GDX
H.U.I breaking
Gold Miners Valuations of Individual Stocks
Neumont
In the market context,this stock has already emerged from the “turbulent waters.”
Barrick Not entirely out of the turbulent waters yet, but the coast is visible.
Franco Nevada In the middle of the fight. Rising, but still has some way to go.
Investment Vehicles for Gold Miners
As you know, we trade ETFs: This sintetic includes an index that include all gold miners valuations.
1.Gdx
2 Direxion Daily Gold Miners x 2(Nugt)
3 Direxion Daily Junior Gold Miners x 2 (JNugt)
Reaching this zone, as you can see, is a path that involves a lot of work. This is the end of the process. As always, these are not recommendations. This is our analysis that we make public for marketing purposes.
I hope you enjoyed it. I had a great time breaking down this issue. Subscribe, share it, it won’t cost you anything, and it will make our day.
Martin
I’m a financial advisor but not a technical trader, and am trying to follow along. Are you saying that copper miner company stock prices, such as in the ETF for it, will rise soon based on what you shared above? Please clarify for me, and thank you very kindly.