Gold is on a tear, shattering records seemingly every day. However, this haven’t translated into a windfall for gold mining companies – at least not yet. Analysts and portfolio managers are cautiously optimistic that the sector, long overshadowed by the rising price of the precious metal, is finally poised for a turnaround.
There’s some evidence to support this optimism. The VanEck Gold Miners ETF, a basket of the world’s largest gold miners, has climbed 10.5% in the past month, roughly mirroring the 23.7% increase in the price of gold itself. But even analysts recommending gold mining stocks are hedging their bets, given the sector’s recent struggles.
Newmont Corp., the world’s largest gold miner, exemplifies this struggle. Despite rising gold prices in recent years, the company’s free cash flow per share has consistently declined. Analysts cite rising mining costs, increased capital expenditures, and falling production as key culprits. This has led some investors to doubt Newmont’s ability to meet its gold production targets, even though Citigroup remains bullish on both Newmont stock and gold itself, forecasting a potential 25.7% increase in gold prices within the next year.
Barrick Gold Corp.’s recent first-quarter results offered further mixed signals. While analysts noted the company’s production outlook fell short of expectations, Barrick also forecast higher than expected costs. This, coupled with a 7% year-over-year increase in cash costs despite relatively stable production, indicates “mining inflation” continues to be a challenge for the industry.
Another twist in this story is the role of gold-backed exchange-traded funds (ETFs), which traditionally mirrored gold price movements. However, these ETFs have experienced ten consecutive months of net outflows, suggesting a lack of investor enthusiasm. Instead, analysts attribute the recent gold price surge to elevated purchases by central banks, particularly in China.
John Hathaway, a senior portfolio manager, highlights Agnico Eagle Mines Ltd. as a notable exception. This Toronto-based company, now the world’s third-largest gold miner after a series of acquisitions, has seen its share price rise 14.3% in the past year and its net income steadily climb since 2019. Hathaway attributes Agnico Eagle’s success to its focus on operational efficiency, even as inflated labor, fuel, and other input costs continue to squeeze margins across the industry.
One unexpected source of optimism comes from U.S. retailer Costco Wholesale Corp. The addition of solid gold bars to their online store has resulted in surprisingly brisk sales, potentially reaching $200 million per month according to estimates. While still a drop in the bucket compared to ETF outflows, this trend suggests a potential return of investor interest in gold, particularly among non-traditional participants.
The gold mining sector remains a significant contributor to the Canadian economy, with hundreds of companies listed on the Toronto Stock Exchange. While challenges persist for gold mining companies, renewed investor interest in gold, coupled with ongoing geopolitical uncertainties, could drive sectoral growth. A significant inflow into gold mining equities could have an outsized impact, exceeding even the percentage gain in the gold price itself. However, historical performance and past mistakes by gold miners leave many analysts cautiously optimistic about the sector’s ability to fully capitalize on the current gold boom.
Source: Yahoo Finance
