Gold Stocks Surge, GDX Rebounds from 16-Month Low

GOLD STOCKS NEWS – Gold stocks surged Tuesday as the Market Vectors Gold Miners ETF (GDX) advanced $1.58, or 3.1%, to $52.75 per share.  The gold stocks sector and GDX were bolstered by strength in COMEX gold futures, which climbed $18.70, or 1.2%, to $1,615.40 per ounce on the back of a weaker U.S. dollar.  A broad-based rally on Wall Street also helped lift gold stocks, as the S&P 500 jumped 2.6% to 1,236.25 in early afternoon trading.  Gold stocks in Canada headed north alongside the GDX, as the S&P/TSX Global Gold Index notched a 2.7% gain.

The rebound in gold stocks provided a much-needed respite for investors, considering that the GDX finished yesterday’s session at $51.17 – its lowest level on a closing basis since August 24, 2010.  Gold stocks have fallen victim to significant selling pressure in recent weeks as liquidation has engulfed the precious metals space.  Even with today’s advance, the GDX remains lower by 12.7% this month alone, and by 14.4% on a year-to-date basis.

Several gold stocks have been in the news already this week due to a flurry of price target revisions by Wall Street analysts.  Yesterday UBS analyst Brian MacArthur lowered his target on Agnico-Eagle Mines (AEM) to $54.00 from $59.00 due to higher cash costs estimates in 2012 and 2013 at the Company’s LaRonde, Pinos Altos, Kittila and Meadowbank mines.

In UBS’ report, MacArthur noted that “Applying our P/NAV multiple of 0.85x (down from 0.9x on continued operational risk) to the operating component of our revised NAV (using $1900/oz gold) of $63.66 (down from $65.25) and adding non-gold assets of $0.15, we derive our price target of $54. Given the implied return, we rate the shares Buy but we note the market will likely take a ‘show me’ attitude with respect to production improvements thereby implying a re-rating may take some time.”

This morning CIBC analyst Barry Cooper downgraded Eldorado Gold (ELD.TSX, NYSE: EGO) to Sector Performer from Sector Outperformer and slashed his price target to C$6.00 from C$20.00 per share.  The downgrade followed Eldorado’s announcement yesterday to acquire European Goldfields (EGU.TSX) for C$2.5 billion.  European Goldfields owns three development stage gold projects in Greece and Romania and one small polymetallic (lead/zinc/silver) mine in production in Greece.

Cooper wrote in his report that “Should the acquisition of EGU be successful, the risk profile of the company will increase with exposure to Greece where taxes and operating terms are likely to fluctuate.  We are neutral on the transaction, but believe that investors will not be inclined to choose the name given the de-risking that is taking place in the market…We calculate that the purchase of EGU is neutral to the company’s NAV/sh, but highly dilutive to EPS and CFPS over the next few years. With a market that has become short-term focused, we do not think investors will show the patience that is required for realizing value out of EGU.”

Despite the bearish commentary, however, AEM climbed $1.23, or 3.4%, to $37.43 per share and EGO rose $0.32, or 2.5% to $13.26 per share on Tuesday.

In contrast to Agnico-Eagle and Eldorado, several small- and mid-cap gold stocks received target price increases from Scotia Capital this week after the firm raised its 2014 gold price forecast to $1,750 from $1,400 per ounce and its 2015 estimate to $1,500 from $1,300 per ounce.

Due in part to its more bullish gold price outlook, Scotia lifted its target on Alamos Gold (AGI.TSX) to C$25.00 from C$24.00, on Dundee Precious Metals (DPM.TSX) to C$13.75 from C$12.50, on Rainy River Resources (RR.TSX) to C$11.00 from C$10.00, and on Torex Gold Resources (TXG.TSX) to C$3.50 from C$3.00 per share.