Gold bars and granules. File photo: Reuters

Gold mining shares are bouncing back from a disastrous 2013 and are expected to far outperform the price of the precious metal in coming months, as company efficiency measures lure investors back to the sector.

Years of over-spending on expansion projects and disruptive merger activity fell heavily on mining companies last year, just as the gold price posted its biggest annual drop in 32 years.

Gold mining stocks plunged 53 percent on average versus a 28 percent drop in gold prices after a 12-year bull run.

Eight months into 2014, the gold mining sector is rapidly making up some of the lost ground with a 22 percent gain to date, outperforming global mining shares overall.

Goldcorp has gained 34 percent and Randgold Resources has added 33 percent.

The gold price, meanwhile, has risen by just 9 percent to $1 318 (R14 140) an ounce.

On Friday, it fixed at $1 309.75 in the afternoon.

UK-registered equity funds have increased their exposure to gold mining shares to an average of 1.55 percent, the highest since November, according to data from Morningstar.

“We are witnessing how business execution and delivering on plans can lead to better equity performance,” Ani Markova, a fund manager at Smith & Williamson Investment Management, said.

“The equities are trading at historically low valuations and offer investors the ability to participate in miners’ significant cash-flow leverage to small positive changes in the gold price,” she added.

The surprise double-digit dive in the gold price last year forced mining companies to implement austerity measures to conserve cash and improve capital allocation.

At a lower gold price, they now have lower margins and cannot afford to consider high risk moves.

“The companies aren’t able to destroy value in the way they were before,” Catherine Raw at BlackRock said.

“The sort of risk we have taken on within the gold companies has changed as we get a little more comfortable that the gold price is stable to rising at that $1 250 to $1 350 level, and that the companies… are starting to do the right thing.”

Raw said BlackRock had increased its overweight exposure to Canadian-listed Eldorado, citing its high quality resource base and potential to generate strong cash-flow at gold prices around $1 200 to $1 300 in coming years.

BlackRock’s funds reduced an underweight exposure in AngloGold Ashanti, which is diluting its high-risk, high-cost production in South Africa by adding assets in Central Africa and Australia that are lower cost and higher grade.

While the sector as a whole is seen to be moving in the right direction, some laggards remain.

“Last year, you’d have lost between 50 percent and 90 percent of your money investing in gold shares, but there was nowhere to hide,” Neil Gregson at JP Morgan Global Natural Resources fund said.

“The difference between the poorest and the best performance is very wide (this) year to date, some stocks are down 50 percent and some are up 150 percent.”

The sector as a whole is still cheaper than it was in 2010, which makes it attractive for investors.

From 2011, gold companies started to be de-rated as they lost control over operating costs and gold prices headed down from highs, Robert Adair at UOB Asset Management said.

Gold hit its highest level at $1 920.30 in September 2011.

“There is now potential for a re-rating of the price-earnings, price-cash flow, as well as the enterprise value to earnings before interest, taxes, depreciation, and amortisation multiples that investors are willing to pay for gold companies.”

This bodes well for performance in the rest of 2014. – Clara Denina and Silvia Antonioli for Reuters