Buoyed by a new mantra of cost discipline, Canadian gold miners are starting to catch the wave of booming bullion prices after a summer of woe.
From major producers like Barrick Gold Corp., Goldcorp Inc. and Kinross Gold Corp. to junior explorers, gold mining stocks are booming, propelled by a shift in the industry to restrain spending and focus on profits and cash flow, rather than pursue reckless strategies that favoured growth at any cost.
The spot price of gold danced around $1,779 (U.S.) an ounce on Wednesday, or about seven times where it was a decade ago, when central banks were bailing out of the metal. Today, banks are piling back into gold to hedge their U.S. dollar reserves as forecasts for gold prices climb above $2,000 an ounce. And gold stock prices are beginning to catch fire.
Drastic shifts in corporate strategies are helping gold companies and their shares, repairing a disconnect between their valuations and the price of the metal.
Risk-weary investors had favoured exchange-traded funds (ETFs) for exposure to gold, rather than shares of the miners themselves.
But the industry made decisive moves in the summer to win back skeptical investors, notably the ouster of CEOs at Barrick Gold and Kinross. Today, gold companies "have got religion" by emphasizing profitability over growth, asset manager Adrian Day said on the sidelines of the Cambridge House junior mining conference in Toronto last week.
"Six months ago, if a new client came in, I bought him far more ETF than I had ever done before, I just bought 15 per cent ETF right off the bat, because that was a better value than Barrick or Newmont at the time," Mr. Day said. "Last month, it became the opposite, I just stopped buying gold and started buying the stocks, because they were just so cheap relative to gold," he said.
Among those riding the wave of new investor interest is Toronto-based Barrick, the world's largest gold producer that replaced its chief executive officer in June amid billion-dollar cost overruns at its flagship development project in the southern Andes mountains.
Barrick shares traded at $40.65 on Wednesday, or 30 per cent higher than 52-week lows hit in July, when it also shelved projects not deemed economic.
Kinross, which also let go its CEO over the summer, was trading at $10.31 a share on Wednesday, up 44 per cent from May.
"Things seem to be lining up. Anything could happen, but I think more and more people are getting the sense that this could be a pretty good run for gold," said Sean Boyd, CEO at mid-tier miner Agnico-Eagle Mines Ltd., whose shares are up 40 per cent in the year to date.
Gold prices have risen 15 per cent since May, in anticipation of a third round of quantitative easing by the U.S. Federal Reserve, which it finally announced on Sept. 12 in the form of a multibillion-dollar bond-buying program. It also pledged to keep benchmark interest rates near zero until at least mid-2015.
Investors are pouring into gold as a hedge against inflation – which many see as an inevitable consequence of U.S. monetary policy once the economy picks up – and central banks from emerging economies like Mexico, Russia, China and India, among others, are said to be active buyers. According to Bloomberg News data, for example, the Philippines increased the physical size of its gold reserves by 31.59 per cent over the past year.
"I think the factors are in place more than ever for a further rise in the gold price," Barrick CEO Jamie Sokalsky told CNBC on Sept. 11. "I think that the gold price could definitely surpass previous highs, go above $2,000 and even higher within the next year."
"I've been around the gold industry a long time now, and I've never seen such broad-based demand for gold," said Randall Oliphant, executive chairman of New Gold Inc. and a former CEO at Barrick.
Richard O'Brien, CEO at the world's No. 2 gold producer, Newmont Mining Corp., told Bloomberg news in late September that gold may reach $2,500 in three years.
Money is also trickling back to junior miners that survived on shoestring budgets for much of the past year as interest in the sector dried up. The BMO Junior Gold Index ETF, designed to replicate the performance of a junior gold companies index, is up 37 per cent since May.
"Smart money is coming back to the market," Michael Fulp, a geologist and newsletter writer, told a Cambridge House panel. "Private placement money is coming back to the markets in a way it wasn't even a few weeks ago."