Citigroup: ‘Don’t be tempted’ to buy gold mining stocks

Gone too long

The gold price extended the week’s losses on Thursday sliding to a near 4-month low as negative sentiment sweeps the market.

On the Comex division of the New York Mercantile Exchange, gold futures for August delivery touched $1,251 an ounce during regular trading, the lowest since end January.

Gold is still modestly up in 2014 but has retraced 68% of its year to date rally, down $123 from highs reached mid-March as the rally on the back of safe haven demand loses steam and lower prices fail to entice bargain hunters.

Investment blog Barron’s quotes on Thursday from Citigroup’s so-called Global Gold Book which paints a grim picture of prospects for the industry and that the “poor fundamentals [is] difficult to ignore:

Understandably, many shareholders are toiling with the idea of buying into gold equities given the past 12-month’s decline in share prices. We continue our theme of “don’t be tempted”. Clearly there will be rallies in market valuations as sentiment about gold or operating currencies change, but we believe these will be short term in nature and are difficult to time. Long-term shareholder value is driven by a company / industry’s ability to deliver EVA. The odds remain strongly against gold companies on this front.

“Cuts to capex and exploration costs, and high grading, are helping margins near term. However, it is a double edged sword. The reason is that gold companies have to spend an increasing amount of capex just to fight a falling production trend and prevent a blow-out in unit costs.

“It is because of this that we caution that a slow-down in capex will invariably result in a fall in production (over time), which in turn will lead to a faster rise in unit costs. Whether or not they cut capex, we see both scenarios as bad for cash flow delivery and shareholder returns, longer term. Increasing head grades in order to boost near-term results (a practice that has become common over the past year) should also have detrimental effects longer term. There seems to be no easy way out.”

While Citigroup makes no bones about its bearishness on the sector, the bank nevertheless rates Vancouver’s Goldcorp (TSE:G) and top producer Barrick Gold (TSE:ABX) as buys and is neutral on Newmont Mining (NYSE:NEM).

Citigroup cautions investors to stay away from Gold Fields (NYSE:GFI), Harmony Gold (NYSE:HMY) and Sibanye Gold (NYSE:SBGL).