Gold miners slammed

There has been a reasonable bounce in the gold price in recent weeks, but much of the pain has already been felt by the gold miners.

Share prices had been pumped up across the sector as forward earnings estimates were modelled based upon a continuing high gold spot price, but as institutional investors pulled funds out of the sector the gold price collapsed.

And while ever-bullish brokers had rated a swathe of Australian miners as 'buy' recommendations based upon a copper price of around US$5.00/lb, nervous global sentiment has failed to see this happy position materialise with the copper spot languishing at a decidedly pessimistic ~US$3.10/lb.

US gold miner Newmont has been forced to take a large write-down totalling US $1.5 billion as well as laying off staff.

Gold and copper miner Newcrest Mining (ASX: NCM) has already been hit with impairment write-offs totalling a whopping A$6 billion and has a correspondingly ugly share price chart, the company having lost almost three-quarters of its market capitalisation in the past 2 years.

Similar pain was felt by Goldcorp, who booked a $2 billion write-down after recording losses highlighting potential impairments.

This highlights the potential volatility of companies which are exposed heavily to one metric such as a commodity price or an exchange rate.

While larger mining companies hedge forward their revenue streams, lower commodity prices will ultimately be reflected in the bottom line and lower earnings.

As mining companies deplete their resources over time, they tend to retain capital for thepruposes of re-investment, rather than distributing strong dividends back to shareholders.

This makes it especially important to be wary of buying resources stocks when they are trading at high price-earnings multiples based upon unpredictable commodity price forecasts.

Source; ASX

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