Two years of belt-tightening by the world's biggest gold miners have allowed bondholders to reap greater rewards for less risk, leaving equity investors -- at least comparatively -- in the dust.
The collapse of the commodities super cycle left companies struggling to repair debt-ridden balance sheets. But since 2015, the top three North American gold producers -- Barrick Gold Corp., Newmont Mining Corp. and Goldcorp Inc. -- have all cut debt much more dramatically than companies in the materials sector, where total debt has started to creep higher after falling in the second half of 2016.
One consequence of this is that the longer-term bonds of these senior gold miners are less sensitive to movements in metals prices than are those of the broader materials sector, for both technical and fundamental reasons.
On the technical side, the market for these issues has become increasingly illiquid, as investors tempted to sell got out during recent tenders. That's left most of the debt in the hands of long-term investors, such as insurance companies, who are more likely to hold fast, according to Zachary Chavis, a portfolio manager at Austin, Texas-based Sage Advisory Services Ltd.
"They kind of trade by appointment," Chavis said of the gold miners' bonds. "No dealer is going to short these names."
In contrast, it's easier to buy and sell the debt of other large materials companies, including copper miners, which in turn makes them more reactive to movements in metals prices, Mr. Chavis said.
"It becomes harder to take a bet just on the gold miners, because it's hard to buy them," he said. It's easier to trade names like BHP Billiton Ltd. or Rio Tinto Group, he said.
Fundamentally, debt reduction has solidified the investment-grade ratings of senior gold miners, making them less reactive to market swings, said Nicholas Leach, a portfolio manager at CIBC Asset Management.
"The balance sheet is so strong that it's insulating the debt from changes in the business risk, which are driven by changes in commodity prices," he said. "The performance of their debt securities is more tied to the Treasury market than the commodity prices."
All three companies have outperformed an index of U.S. Treasuries since 2016.
Share performance has been mixed for the three companies since mid-January last year, with Newmont up and Barrick and Goldcorp down. However, the bonds of all three companies have outperformed their stocks.
For instance, an investor who put $1,000 into Barrick Gold's 5.25-per-cent bond due 2042 on Jan. 19, 2017, would have seen $155 appreciation, while an investor who bought $1,000 of Barrick Gold stock on that date would have taken a $128 loss.
Representatives from Barrick, Goldcorp and Newmont declined to comment.
Low liquidity is part of the reason for the debt outperformance, according to Mr. Chavis, as bad news is less likely to drive bond prices lower if investors are inclined to hold positions long-term. Meanwhile, deleveraging by miners means their equity rises less dramatically on higher earnings, Leach said. This helps explain the better performance by the companies' debt versus shares over the same period.
"These investors are taking far less risk than the equity investors -- so much less risk," Mr. Leach said. "And they've been compensated so much better."