What are we looking for?
Growing, cost-efficient gold miners.
We are currently experiencing the longest equity bull run in history amid a lot of geopolitical uncertainty. After a very strong January and February, the S&P 500 is close to the record highs set in 2018, against a backdrop of a potential trade war with China, a fast-approaching Brexit deadline with no Brexit plan and an economic and humanitarian crisis in Venezuela. Those who are long the stock market might, understandably, be looking for a hedge.
Gold is a classic haven asset despite the fact its yield is zero. Currently, the yield on other haven assets such as the Swiss franc and the Japanese yen are negative (portfolio managers are paying for the privilege of parking their money in yen- or franc-denoted money-market securities), which only adds to the relative appeal of the precious metal. And according to The Economist, central banks’ level of net gold buying in 2018 was at the highest level since 1971, when then-U.S. president Richard Nixon broke the U.S. dollar’s peg to the price of gold.
There are a number of exchange-traded funds, the largest being State Street’s SPDR Gold Shares (GLD), that provide direct exposure to the value of gold, but investors might also want to look for gold miners that might benefit from investors piling into the yellow metal and the corresponding price rally.
First, we look for companies that are forecast to increase their gold production from last year’s level, and screen for at least a 50-per-cent increase.
Next, we try to identify companies that will be able to mine the increased levels of gold in a cost-effective way. We consider both the forecast mining cash cost – how much it will cost to produce one ounce of gold at the site level – and all in production cost, which includes all costs, per ounce of gold, required to sustain production over the life cycle of a mine. We screen for less than US$650 and US$900, respectively.
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What we found
The screen yields five companies. Operations for Toronto-based Dundee Precious Metals Inc. are diversified both in terms of geography and the maturity of its production facilities. Its Chelopech mine in Bulgaria has been in production for more than 50 years while its Tsumeb smelter in Namibia produced positive cash flow for the first time in the previous quarter.
Australia’s Newcrest Mining Ltd. (which also mines for silver) could be the most affected name on our list by current gold-merger speculation. Colorado’s Newmont Mining Corp. is near to closing an acquisition of Vancouver-based Goldcorp Inc. However, Toronto-based Barrick Gold Corp., the world’s largest gold miner after acquiring South Africa’s Randgold Resources Ltd., has recently confirmed it has targeted Newmont for acquisition. (Notably, neither Barrick nor Newmont made our list.) There is speculation that should Barrick acquire Newmont, which has mines in Colorado and Africa close to Barrick assets, Newmont’s Australian assets could be sold to Newcrest.
Investors are advised to do their own research before trading in any of the securities shown here.
Hugh Smith, CFA, MBA, is an investment management specialist at Refinitiv.