Gold Miners Glitter as Spot Price Nears 9-Year High
Reprinted from the FT 06/07/2020
Higher dividends and lower costs help producers to outperform. Gold miners’ share prices are soaring with the value of the precious metal, while increased dividends are helping push these stocks higher still. The spot price of gold has risen 17 per cent so far this year and is closing in on $1,800 an ounce for the first time in nine years. The commodity, commonly treated as a reliable store of value by investors, has benefited from nerves over the spread of Covid-19 and the outlook for global trade — and rock-bottom yields available on other haven assets.
Gold stocks have done even better, however, up 23 per cent this year as measured by the NYSE Arca Gold Miners index. Standout performers include Canada’s Kinross Gold and Barrick Gold, and US-based Newmont Corporation, all up at least 40 per cent so far in 2020.
The primary market is also vibrant. Recent share sales by South Africa’s Harmony Gold and Polymetal, a London-listed miner with assets in Russia and Kazakhstan, were completed in double-quick time, with the books covered in 20 minutes, according to bankers working on the deals. “Macroeconomics is playing a part: gold has reasserted its status as a safe asset,” said one banker involved in the $200m Harmony deal.
Given the favorable backdrop for gold — safe instruments such as US government bonds are effectively paying investors a negative return — analysts and sector specialists reckon gold and gold-related equities have further to run. “With swelling central bank balance sheets, and rates in the US and most major developed economies close to or below zero, we see the macro backdrop as supportive,” said James Bell, an analyst at RBC Capital Markets, in a recent report. At the same time, big producers have also started to crank up returns to shareholders. The total per-share dividend of the five biggest gold miners has risen from $1.50 in 2015 to $3.20 in 2019, according to UK-based asset manager Ninety One.
Bullish fund managers think there is further to go. George Cheveley, a fund manager at Ninety One, said the outperformance “isn’t substantial when you consider the tailwind” from lower oil prices and weaker currencies in producer countries, compared with markets where the metal is sold. “We would expect them to do even better and deliver strong returns.”
Last year, “all-in” margins — which include exploration and other general and administrative costs — for a group of big gold producers tracked by RBC exceeded 10 per cent for the first time since 2012. Mr. Bell thinks the miners can achieve 20 per cent this year on this metric.
The banker on the Harmony deal said investors were attracted by the stock’s higher “leverage” to rising prices than can be gained from gold-tracking exchange-traded funds. The idea is that a higher gold price on a fixed cost base can drive up corporate profits quickly. But miners have been criticised in recent years for their profligacy.
After the last boom sent gold as high as $1,900 a troy ounce in 2011, producers spent heavily on deals and projects that turned sour when gold prices started to fall. Since then, the big producers have focused instead on improving their balance sheets. At the end of March, net debt at Barrick Gold, the world’s second-biggest producer, stood at $1.85bn, half the level of a year earlier.