Surging bullion prices might not stimulate blockbuster dealmaking, but there are signs generalist investors are wading back into gold stocks after a protracted period of shunning the sector.
“I hadn’t gotten a call about gold from a client in the better part of a year and a half, and I got one yesterday,” said Matt Barasch, portfolio manager with RBC Dominion Securities in Toronto, who manages money for retail clients.
Gold hit a six-year high on Wednesday north of US$1,500 an ounce, driven by escalating trade-war tensions between the United States and China, falling interest rates and a slowdown in global growth. Historically sought out as a safe-haven investment, gold has risen by 17 per cent in 2019, after languishing in the US$1,300 range for about three years. Gold stocks meantime have done even better. Barrick Gold Corp., Agnico Eagle Mines Ltd. and Kirkland Lake Gold Ltd., Canada’s biggest gold companies by market value, are up 30 per cent, 41 per cent and 74 per cent respectively this year.
“When investors start seeing gold popping up on the front page of the business section, hitting multiyear highs, that’s when all of a sudden they start to think ‘Wow, I really need this in my portfolio,'" Mr. Barasch said.
Clive Johnson, chief executive of B2Gold Corp., whose share price rose by 11.4 per cent on Wednesday, after turning in a much better second-quarter performance than expected, said he’s also seen evidence of generalists – investors who can invest in any sector, as opposed to specialists who tend to stick to one part of the market – returning.
“We’re definitely having more conference calls, more meetings with generalists; they’re starting to express interest.”
It’s impossible to know if the current bull run is a flash in the pan, or the start of a sustained move upward for gold prices. But for now, higher bullion prices mean gold companies are more profitable and generating increasing amounts of much-coveted free cash flow. Unlike the previous bull run, which started in the early 2000s and lasted through late 2011, gold companies aren’t grappling with surging oil prices, meaning they aren’t seeing an offset in margins in one of their key fuel input costs. Some gold development projects, previously deemed as uneconomic, may suddenly have swung to a profitable proposition on paper.
However, a decade of underspending on exploration means there are few near-term, promising projects on the books of the major gold miners. Instead, many are low grade, situated in remote locations, with huge capital-expenditure requirements, meaning the bump in the gold price is unlikely to move the needle much.
As well, the last cycle saw some major disappointments, including Barrick spending about US$8-billion attempting to build a mine in the Andes that never produced an ounce of gold. (The project was halted in 2013 by Chile’s environmental regulator amid objections to Barrick’s water-management system.) More recently, New Gold Inc. has been losing hundreds of dollars an ounce, amid huge cost overruns, on its low-grade Rainy River mine in Ontario. Investors are demanding better performance this time around from the entire sector.
“We want [companies] to chase high margins and good grade, not low margins and low grade,” said Jon Case, precious metals portfolio manager with Sentry Investments Inc.
Mr. Case doesn’t see the move in the price of bullion having much, if any, near-term impact on mergers and acquisitions (M&A). If anything, the status quo will actually give companies pause before doing deals, as management teams try to figure out where the gold price will eventually land.
“M&A kind of gets put on the back burner when you’ve got increased gold volatility,” he said.
The expected restraint in M&A stands in contrast to the last bull cycle in the gold industry that saw big miners make big acquisitions, including Barrick, Goldcorp Inc. and Kinross Gold Corp. spending collectively about US$17-billion on top-of-the market acquisitions, only to eventually write down much of their value in subsequent years.
Barrick’s US$6-billion nil-premium acquisition last fall of Randgold Resources Ltd. ushered in a new era of discipline in the industry. This year, Newmont Mining Corp. (now Newmont Goldcorp Corp.) bought Vancouver’s Goldcorp Inc. in an all-stock deal at a slim 17-per-cent premium. Kinross under CEO Paul Rollinson has also been more disciplined around M&A. Last week, the company announced its first gold deal in four years with the purchase of a Russian development asset for US$283-million, a deal that boosted its share price.
“I hope we don’t get back to the silly season of acquisitions,” B2′s Mr. Johnson said.
“We won’t be doing it. That’s for sure.”
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