One cough and miners all catch cold

Most will not be familiar with West Australian gold exploration company Evolution Mining.

Most will not be familiar with West Australian gold exploration company Evolution Mining.

It distinguished itself on Tuesday morning by being the worst performing stock in the over $500 million market capitalisation category on the Australian Securities Exchange. Its share price fell almost 18 per cent when trading opened.

It underperformed a bunch of other relative unknowns such as Silver Lake Resources, Medusa Mining and Regis Resources.

All these stocks and many other gold hopefuls were trashed on the market as gold aversion fever took an even tighter grip.

The real punters trawl the market for these kinds of stocks. They represent an opportunity to make great capital gains if one gets in at the right price. Hopefuls such as these are the first to fall and experience the hardest hits if prices move against them.

While there are larger gold stocks in Australia, such as Newcrest and PanAust, that have also fallen victim to the gold price toppling over a cliff, they are more established and will be better placed to ride out the price rout.

Putting aside the extraordinary events of the past couple of days, investors in gold producing stocks have not had the huge gains that have been experienced by direct investors in gold. But they have been feeling the knock-on effects of the tumbling gold price.

Analysts are now having to revise their numbers on the gold miners and their projects to ascertain which can make a decent return on lower cash flows after factoring in a plunging gold price.

This all makes perfect sense. Certainly it makes more sense than the crash in the gold price, which has fallen to a series of disparate triggers. The fall is as much about sentiment as anything else.

What is more confusing (but more important to Australian investors) is the contagion effect the gold price fall has on other mining and energy companies.

It's one thing for precious metals to move into a fog but it's another to have mining companies that don't produce them follow suit.

Some slightly softer growth numbers out of China won't have helped big mining companies but the iron ore price is holding firm at $US140 a tonne and the oil price is not retreating rapidly.

But even the large miners such as BHP Billiton and Rio Tinto have been victims of the gold slump.

Regardless of whether it is hedge funds covering gold bets or an overreaction to China, the fact is that Australia's mining sector is particularly sensitive to changes in commodity pricing and sentiment.

Big share price falls affected other mineral producers. Nickel, copper and some iron ore producers were hit. Some oil and gas stocks felt the heat, as did uranium miners including ERA and Paladin.

More moderate falls by our big miners such as BHP and Rio pulled the market down generally, despite the fact that the quarterly production figures issued by Rio on Tuesday were solid.

Mining services companies such as Boart Longyear and Seven Group Holdings ( the Australian Caterpillar franchise holder) have felt a dose of the resource virus.

This week has demonstrated how unpredictable commodity prices can be.

The roller-coaster in precious metal prices coincides with the release of the minutes of the Reserve Bank's recent meeting at which it kept interest rates on hold.

One has to wonder whether the RBA's wait-and-see tone would have been more negative had that meeting been on Tuesday. This is not to suggest the May RBA meeting will produce an interest rate cut but the prospect of a cut might come back onto the agenda later.

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