Loading ...With free cash flow surging 11x, the timing of this investor exodus seems off; and the shakeout seems orchestrated by smart money to scare weak hands so they can accumulate more.
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H/T CRESCAT CAPITAL FOR THE CHART
Mining stocks were hammered today, down an average of 7% in reaction to gold’s $50+ drop, regional bank issues, President Trump’s trade war escalation with China, and the ongoing government shutdown.
Yet mining stocks are likely overreacting dramatically. Put simply, these companies are effectively printing money at current gold prices. The above chart from Crescat Capital shows an incredible disparity between the XAU Index price performance and free cash flow per share that has opened up recently.
Yes, mining stocks have performed incredibly well, but the aggregate free cash flow of the Philadelphia Gold and Silver Index has surged 11x while prices have only risen 2.5x.
In short, fundamentals have far outpaced the rally, leaving these stocks even more undervalued than before they started their historic run. Miners are cash rich with AISC around $1,500 while gold trades over $4,200; margins higher than the entire gold price not long ago.
Despite today’s drop, mean reversion will likely hit at some point, and the cycle of uptrend, consolidation, uptrend should remain intact.
The macro backdrop is unchanged, including central banks purchasing 30% of annual supply. Q3 earnings reports are coming in just a few weeks, and smart money will undoubtedly capture these equities on sale after weak hands gave up so much today.
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