A New Equity Bear Market? This One Just Ended

bear_header

Equity investors suffered in January. Markets never before experienced such a bad start to a year. Stocks in Europe and Japan entered a bear market, while the US is on the brink of one. Some people panicked. Some were pleased, being able to pick up their favorite stocks somewhat cheaper.

Gold equity investors probably shrugged. To them, January was just a blip. They smile faintly when they read all the comments about a hard landing in China. Because slowing growth in China already caused a four year bear market in commodities and gold. This devastating bear took most gold stocks down 80%, 90%, and sometimes more than 95% from the peaks in 2011 to stunning historical lows.

bear_market1

Did commodity producers do stupid things at the top of the cycle? Absolutely. We’ve seen value-destructing debt-financed M&A. We’ve seen billions of CAPEX being thrown into what we now recognize as sinkholes. But companies learned. Managements were replaced. Costs were cut. Humility and the shareholder perspective retook the center stage in a lot of cases.

We also need to remember that mining will always be a margin game. Gold and silver prices have come down. But miners profit from declining input costs. Companies located outside the US also receive a huge boost from depreciating currencies. It is therefore no surprise that we’ve witnessed a nearly commensurate decline in all-in sustaining costs (AISC) at gold miners.

bear_aisc1

As a result, we’re about to see positive free cash flows at senior gold miners this year, even at $ 1.100 gold. This is obviously a very encouraging prospect after many quarters of cash burn.

bear_cf

With cash flows are looking better, are investors appreciating the operational improvement? Not at all. The bear took its toll. Sentiment is still depressed. Gold miners are now trading at the lowest price-to-cash-flow multiples we have seen in decades, if ever. And remember when gold stocks used to trade comfortably above their NAVs, given their leverage to gold prices and embedded exploration potential? Investors are currently able to buy at large discounts to NAV.