Canada Stocks Top Among Biggest Markets on Gold Surge

Canadian stocks are beating the world’s biggest markets this year, as a surge among gold miners propels the benchmark equity gauge toward a five-year high.

The Standard & Poor’s/TSX Composite Index had risen 13 of the past 14 sessions through yesterday, including a 12-day streak that was the best since 1995. The gauge has advanced 4.2 percent in 2014, more than any of the world’s 17 biggest markets, including Japan, Germany and the U.S., led by a 29 percent surge in an index of gold miners. The S&P/TSX briefly climbed above the highest closing price since April 2011 yesterday and now trades 5.9 percent below its record in June 2008. The benchmark gauge slipped 0.3 percent to 14,188.98 in Toronto at 4 p.m.

The 10 best performers this year are metals miners, paced by a 154 percent surge at Detour Gold Corp., as investors wager they can reduce costs while prices rebound from the worst year in three decades. Valeant Pharmaceuticals International Inc. has rallied 30 percent to lead gains outside the materials sector. Foreign investors returned to the Canadian market in the closing months of 2013 as the S&P/TSX began its rally, according to data compiled by Bloomberg. The gauge added 9.6 percent last year, 11th among 17 developed-market peers.

“For the companies on the TSX, so long as commodity prices remain fairly attractive, 2014 is going to be better,” said John Kinsey, a fund manager at Caldwell Securities Ltd. in Toronto. He helps manage about C$1 billion ($900 million) with the firm. “Gold got trashed, they got beaten up the past few years, but there’s still a couple of hundred dollars left to go in the price and that’s good for all the gold companies.”

The S&P/TSX’s advance this year comes after a 5.5 percent rally since Feb. 3. The gauge has outperformed the U.S. equities benchmark, which has lost less than 0.1 percent in 2014 after ending the year at a record. Germany’s Dax Index is 1.6 percent higher while Japan’s Topix has slumped 6.4 percent.

$1,500 Gold

After dropping by the most since 1981 last year, gold has rallied 11 percent since the end of December and is headed for a second monthly gain as demand for coins, jewelry and bars increased. The metal advanced yesterday to the highest in more than 16 weeks, with futures for April delivery settling 1.1 percent higher at $1,338 an ounce in New York.

The price of gold will reach as high as $1,500 an ounce at some point this year, Kinsey said, due in part to rising demand from middle-class purchasers in China and India and also as an inflationary hedge as growth in the U.S. picks up.

The S&P/TSX Gold Index has surged 31 percent in 2014, after plunging 45 percent last year for the worst performance since 1997.

‘Way Offside’

“People were way offside, way too bearish,” said John Wilson, co-chief investment officer at Sprott Asset Management LP, a unit of Sprott Inc., in an interview from Toronto. Sprott Inc. manages about C$7 billion, including resource equity and precious-metals funds. “We didn’t give up our views last year and sell. We thought they had a bright long-term future.”

Foreign investors increased investments in Canadian equities as stocks began to advance in the second half of 2013. The six-month moving average of foreign inflows jumped to C$3.83 billion in November, the highest since September 2004, data compiled by Bloomberg show. Foreign investors bought C$18.9 billion in equities last year, compared with C$968 million a year before, the data show.

Nine of 10 groups in the S&P/TSX have advanced in 2014, with a group of health-care stocks rising 26 percent to lead gains. Valeant Pharmaceuticals International Inc. has added 30 percent after doubling in 2013.

Messages left with Laurie Little, a spokesman for Valeant Pharmaceuticals, were not immediately returned.

Energy, Banks

A gauge of energy producers jumped 3.9 percent as crude rose above $100 a barrel this month for the first time in 2014. Oil prices are up 5.5 percent in New York in February.

Banks and other financial firms, which account for 34 percent of the gauge’s weighting, have gained 0.1 percent. The nation’s largest lenders begin reporting quarterly results this week.

“It will be slow and steady with the banks with an attractive dividend yield, and on the energy side they’re focusing on profits instead of production so as long as the crude price stays above $100 they will do very well,” Kinsey said.

An index of materials stocks, which includes gold and silver miners, has rallied 18 percent. The group fell 31 percent in 2013 for the worst performance in the S&P/TSX. Commodities stocks make up 38 percent of the benchmark index.

Silver Stocks

Fortuna Silver Mines Inc. has jumped 64 percent and Silver Standard Resources Inc. has added 62 percent to lead producers of the precious metal higher. Silver prices have gained 14 percent this year and yesterday touched $22.215, the highest price since October.

Gold stocks in the S&P/TSX have benefited as rising prices and cost cuts look poised to deliver wider operating margins, said Jon Case, a fund manager at Sentry Select Capital Corp. in Toronto. He co-manages the firm’s C$500 million precious metals growth fund.

“Every $100 move downward was in some cases cutting margins in half, so you’d see prices go down and the stocks fall 30 percent,” Case said in a Feb. 18 phone interview. “Now, you’re seeing that leverage on the other way back up.”

Detour Rebound

Detour Gold, the worst-performing stock in the S&P/TSX last year with an 84 percent decline, has more than doubled this year to lead gains. The company said last month it will produce 450,000 to 500,000 ounces of the metal in 2014, more than twice its output a year ago, at an average of no more than $900 an ounce.

If gold can hold at $1,330 an ounce and Detour can produce 475,000 ounces, the company would generate an additional $75 million in cash, said Michael Siperco, analyst with Macquarie Capital Markets Canada, in a note to clients Feb. 18. He raised his price target for the stock to C$16 from C$11.

“Even after the year-to-date gain, we see a lot more upside over the course of the year,” Siperco said of the stock.

Mining Costs

Barrick Gold Corp. and Goldcorp Inc., the world’s two biggest miners by market capitalization, both lowered their fourth-quarter operating costs from a year earlier, responding to the plunge in gold prices. Barrick’s so-called all-in sustaining costs dropped 14 percent to $899 an ounce, the company said in its Feb. 13 earnings results. Goldcorp’s costs fell 11 percent to $810 an ounce by the same metric, the company said in its own results the same day.

“We have become a leaner, more agile organization, better protected against further downside price risk,” said Jamie Sokalsky, chief executive officer at Barrick, in a Feb. 13 statement.

Goldcorp shares have advanced 33 percent this year after plunging 37 percent in 2013. Barrick has gained 26 percent after its worst year as a public company wiped C$12.1 billion from its market valuation.

Sadiq Adatia, chief investment officer at Sun Life Global Investments, said the rally in gold stocks is a temporary one and he is not interested in investing in Canadian gold equities.

‘Underweight Gold’

“I don’t see much catalyst to go higher,” Adatia said in a phone interview from Toronto. He manages about C$7.4 billion with the firm. “The gold companies are not operating efficiently. We worry that no matter what gold does, can the companies take advantage?”

His firm is overweight U.S. equities and underweight Canada, which is “in essence underweight gold as well,” he said.

Sprott Inc. saw its investments fall by almost a third to C$7 billion from C$9.9 billion last year, according to a Jan. 20 statement, as a gold-price slump prompted investors to flee its metal-focused funds.

“When you come into a new year and some of the factors that caused the previous slide reverse themselves, they can go a long way to getting things back to where they should’ve been,” Sprott’s Wilson said.

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