The equity market's gotten a big boost by earning surprises such as last Thursday's early profit report from Wells Fargo & Co. (NYSE: WFC). The Dow Jones Industrial Average spiked 250 points, or 2%, on the news that the bank expected a $1 billion increase from year-ago earnings.

With earnings season ramping up, the chattering classes are deep in speculation about the next big surprise on the horizon. Goldman Sachs' number came as a surprise Monday, but there was a strong hint a couple of weeks ago from a rather surprising quarter - gold mining.

Gammon Gold, Inc. (NYSE: GRS), a Nova Scotia-based operator of two Mexican mines, whiffed the green eyeshade set with a March 25 release showing earnings 40% higher than forecast. The surprise contributed to a 4% one-day spike in the NYSE Arca Gold Miners Index.

Presently, there's a freshening breeze blowing at the back of gold stocks that's pushing the sector's performance ahead of bullion's. Since the equity market turned buoyant five weeks ago, gold stocks have gained nearly 7%, while bullion prices slumped 3%. That performance differential has been reflected in the shrinking price multiple of the SPDR Gold Shares Trust (NYSE Arca: GLD) over the Market Vectors Gold Miners ETF (NYSE Arca: GDX). The ratio, which peaked at more than 4-to-1 when the banking crisis broke open, has been since nearly halved.

Gold (GLD)/Gold Stock (GDX) Ratio

One has to wonder about the likelihood of more earnings surprises like Gammon's. Earnings are notoriously volatile for gold miners. So, too, is the degree to which analysts' projections over- or undershoot the companies' actual profits.

More than a third of the constituents of the NYSE Arca Gold Miners Index are due to report earnings in the coming month. The earnings track record of the 10 largest, each with a market capitalization over $1 billion, may provide us the means for handicapping the odds of earnings surprises this season.

In the last quarterly go-around, covering 2008's fourth quarter, six out of the top 10 miners produced greater-than-expected earnings, a vast improvement over the preceding two quarters when only one issue beat Street estimates.

The three largest producers all cranked out single-digit surprises. Barrick Gold (NYSE: ABX) outdid forecasts by nearly 7%, Goldcorp Inc. (NYSE: GG) bettered fourth-quarter expectations by more than 9% and Newmont Mining Corp. (NYSE: NEM) earned 4% more than projections. Smaller companies - Yamana Gold, Inc. (NYSE: AUY), Silver Wheaton Corp. (NYSE: SLW) and Royal Gold, Inc. (Nasdaq: RGLD) - cranked out disproportionately larger surprises, in part because of their smaller EPS baselines.

The median surprise number in the fourth quarter was a positive 5.4%, but that belies the tremendous variance among the 10 issues' performance. The quarter's mean surprise number was, in fact, a negative 38.7%, brought low largely because of an outsized loss cranked out by AngloGold Ashanti Ltd. (NYSE: AU). AngloGold has been one of the more volatile earners in the index's top 10. Three quarters earlier - that is, the period ending March 2008 - the company's earnings outperformance put it well ahead of the other three firms then beating analysts' expectations.

 Prev12Next