Newmont Mining Corp (NEM), Barrick Gold Corporation (USA) (ABX): The Biggest Risk For Gold And Commodity Investors In 2013

For smaller firms, known as junior miners, the situation could become even more dire as their total debt is often expected to be repaid in less time than the big miners. Some mining firms have seen their share prices plunge more than 50% this year. Such a sharp downward move often suggests looming financial distress. That’s not always the case, so it pays to do more research to identify potential balance sheet risk, but some of these big plungers include:

• Allied Nevada Gold Corp. (NYSEAMEX:ANV)
• Golden Star Resources Ltd. (USA) (NYSEAMEX:GSS)
• DETOUR GOLD CORP (OTCMKTS:DRGDF)
• PERSEUS MINING (OTCMKTS:PMNXF)
• HOCHSCHILD MINING (OTCMKTS:HCHDF)

Risks to Consider: As an upside risk, any sign that China’s slowdown has been mitigated by government stimulus programs could give a quick boost to commodity prices.

Action to Take –> The mining industry is suffering from both a slowing in China and also an overly ambitious expansion program over the past few years that is bringing too much supply to a depressed market. We probably haven’t seen the last of this industry’s woes, and before you decide to invest in miners, you should assess their balance sheet and cash flow statements with a great deal of scrutiny.

Also, today’s tougher pricing environment, and the cash crunch it is causing, is leading to a sharp slowdown in any new project development. That could lead to a phase of weak growth down the road, as The Wall Street Journal recently noted.

So it’s unwise to anticipate a sharp snapback in industry share prices back to levels seen a year or two ago, even when commodity prices finally rebound.

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