What happened
Shares of most precious metals producers posted healthy gains Tuesday as the S&P 500 bounced back from a 12% decline on Monday. Investors might not want to get too carried away -- volatility is likely here to stay given the circumstances -- but Wall Street reacted favorably to new federal stimulus measures being planned to prop up the American economy.
That propelled shares of Coeur Mining (CDE -2.42%) as much as 39.9% higher. Shares of Hecla Mining (HL -3.04%) rose as much as 29.4%, whereas shares of Yamana Gold (AUY) and Franco Nevada (NYSE:FNV) hit daily highs of 22% and 16.7%, respectively. All of the gold and silver stocks cooled off a bit in late-afternoon trading.
Image source: Getty Images.
So what
These precious metals producers didn't exactly get off to the best start to 2020, even before the coronavirus pandemic slammed the breaks on the global economy. Through mid-February, shares of Coeur Mining had tumbled 25% since the beginning of the year and shares of Hecla Mining were down nearly 13%. Yamana Gold fared slightly better, posting a nearly 4% gain through that time. Shares of Franco Nevada had delivered a nearly 12% gain.
Then, somewhat surprisingly, most asset classes fell together in early March. Bonds, stocks, and gold all declined in value simultaneously, which is not what investors might have expected. Precious metals tend to see higher demand as a safe haven investment when the economy begins to show signs of weakness, but gold prices tumbled from nearly $1,700 per ounce to below $1,500 per ounce in less than two weeks. Again, given the circumstances and lack of historical parallels, investors apparently decided to sell everything until more information was available.
Well, more information has been trickling in this week. On Monday, the U.S. Federal Reserve lowered the benchmark federal funds rate to a target range of 0% to 0.25%. On Tuesday, the federal government announced a major stimulus plan was being drafted, including the potential to make direct cash transfers to individual Americans. On both days, the government also moved to ensure credit markets had ample liquidity.
Those actions pushed gold prices 3% higher on Tuesday, which helps to explain some of the stock movements in gold and silver stocks. It's also important to remember that the four producers above turned in solid -- and in some cases, record -- years of operations in 2019 on the heels of healthy gold prices. If precious metals prices remained elevated in 2020, then investors expected further improvements to balance sheets and expansions to operations.
For example, Coeur Mining rode significant improvements in gold prices in 2019 to major operational improvements, including a 36% reduction in its debt balance. Franco Nevada turned in a record year of gold production, revenue, and adjusted earnings per share last year. Yamana Gold significantly improved operating cash flows and reduced net debt by $60 million in the fourth quarter alone. Meanwhile, Hecla Mining struggled early last year but appeared to be improving in the second half of 2019.
Now what
On one hand, investors need to be realistic. The economic situation is fluid right now and it will take time to play out. No one has all of the information at the moment. On the other hand, gold prices are significantly higher right now than they were the same time last year -- even after tumbling to $1,500 per ounce. Therefore, it's likely first-quarter 2020 operating results for gold producers could be relatively insulated from the broader economic impacts of the coronavirus pandemic.
