Gold is back in vogue as an investment. Among some investors, anyway. While there aren’t many gold stocks on the market that have proven capable of beating the long-term gains of the S&P 500, a handful have been worthy of consideration for spots in the portfolios of individual investors (mostly gold streaming stocks).
Nonetheless, there are many smaller players with slick investor presentations making promises of big rewards. That could sound intriguing if you’ve caught the gold bug, but it’s important to remember the risks involved when investing in the industry. Luckily, some gold stocks come with big red flags and flashing red lights. Here’s why investors might want to avoid Hecla Mining (NYSE: HL), Tahoe Resources (NYSE: TAHO), and Randgold Resources (NASDAQ: GOLD).
Not so Lucky Friday
Hecla Mining is the largest producer of silver in the United States. However, its largest silver mine, Lucky Friday, has been embroiled in a terrible labor dispute since March 2017. The mine has been offline since then and the two sides — the company and unionized steelworkers — are no closer to reaching a new contract today.
The labor strike has sabotaged the business’ growth trajectory, which finally appeared to be moving upward after huge productions gains in 2016. Considering Lucky Friday is one of only four mines owned by the company, the stock’s 26% slide in the last year isn’t too surprising. Worse, two of the currently operating three mines produced less gold and silver in the first quarter of 2018 compared to the year-ago period. That suggests investors still might have questions about the portfolio even if the ongoing labor dispute was resolved or never happened in the first place.
While the company has continued operations and exploration activities as normal, and has managed to barely churn out profits, it’s simply impossible to ignore the absence of the portfolio’s largest silver mine. With no timetable for when Lucky Friday will once again snap back into production, and with growth projects years away from contributing meaningful volumes of gold and silver, investors might find it easier to avoid the uncertainty hanging over Hecla Mining stock.
Political risks have stung Escobal
Similar to Hecla Mining, Tahoe Resources announced a labor strike at its La Arena mine in Peru at the end of April. But unlike its peer, it announced a resolution 11 days later. That was welcome news for shareholders, who are already dealing with a political fiasco in Guatemala that has knocked the company’s Escobal mine offline since July 2017. That has a lot to do with the stock’s 40% decline in the last year.
It’s been a messy affair, complete with a hardline nongovernmental organization (NGO) physically blocking access to the mine and conflicting decisions from the Ministry of Energy and Mines and Supreme Court of Guatemala. The effect has been more straightforward: absolutely no silver production for the business. Considering Tahoe Resources produced a record 21.3 million ounces of silver from Escobal in 2016 — the last full year of production — the overnight drop to zero production has stung as expected.
Management is confident the Constitutional Court will decide the dispute in the company’s favor, but there’s a laundry list of tasks to complete even if that occurs. Tahoe Resources needs to reinstate its export credential, remove the roadblock installed from the NGO, and rehire employees. In other words, it seems likely that uncertainty will hang over the company for quite a bit longer.
Furthermore, while the business is hoping to greatly increase gold production in 2019, the outlook calls for it to boast some of the highest all-in sustaining costs (AISC) in the industry at $950 per ounce of gold — and that’s the low end of expectations for full-year 2019 performance. Simply put, Tahoe Resources might be too risky for even the most risk-tolerant investors.
Mining taxes creeping up
With a market cap of $7 billion, Randgold Resources is more than twice the size of Hecla Mining and Tahoe Resources combined. But size hasn’t made it any less susceptible to the risks of being a gold miner with global operations. If anything, it may make the precious metals miner more exposed to risks. That appears to be the case for its operations in the Democratic Republic of Congo (DRC).
In March 2018, the country decided to increase the royalty on mining production across the board, including a raise from 2.5% to 3.5% for gold. Copper and cobalt will rise from 2% to 3.5%, and cobalt may be taxed at 10%. While the new mining tax is still low by global standards (copper mining taxes in Germany, Peru, Chile, and Canada all exceed 10%), a lack of infrastructure in the DRC makes mining more expensive to begin with. So even minor changes can have significant effects on the profitability and payback calculus.
For instance, Randgold Resource spent eight years and $2.5 billion to bring its Kibali mine on line. Prior to the institution of the new mining tax, which went into effect immediately, the company expected Kibali to produce 730,000 ounces of gold in 2018. That’s more than Hecla Mining and Tahoe Resources combined.
Management has maintained its original production guidance despite the tax, which has brought together nearly every major gold miner in the country in an attempt to revise the law. Sticking to guidance hasn’t helped to increase the confidence of Wall Street, however, as the stock price has sunk lower with each passing month. Considering the government of the DRC doesn’t appear to be a negotiating mood (and it has to balance tax revenue with industry development), the uncertainty might not subside anytime soon.
These are risky gold stocks
Investors looking for opportunities to buy gold stocks may want to pass on Hecla Mining, Tahoe Resources, and Randgold Resources. Each miner is facing uncertainty from labor disputes or political risks — with no date in sight for reaching a resolution. That could keep a lid on share growth in the near term, while making the long-term trajectory foggier to predict. That uncertainty will only make life as a gold stock desperately trying to beat the returns of the S&P 500 that much more difficult.
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