How gold’s value is assessed differs from other metals, and not just because of its safe-haven status. “If you think about copper or iron ore, you can complete some level of fundamental analysis. What’s the expected demand globally? What’s the forecasted supply coming out of mines and maybe even recycling?”, explained a former senior executive from Newmont. However, gold’s price can experience short-term fluctuations driven by investors and institutions, and, added to this, “because gold does not degrade with time, most of the six billion ounces that have been mined over the last 7,000 years are still with us and in the form of jewellery, bars and coins.”
The US Economic Policy Uncertainty Index1https://www.policyuncertainty.com/ reached a high of 500 in April this year, compared with a spike of 240 during the 2008-09 global financial crisis. The executive from Newmont explained that “in the past, when… I was monitoring this index in relation to gold prices, the correlation was around 60%”, which is “not perfect, but it does emphasise how uncertainty influences investors and the price of gold”. Indeed, there is more uncertainty on the horizon, which could prolong interest in bullion. An upcoming presidential election in the US, strained US-China trade relations and fears of a double-dip recession, according to the specialist, are “all factoring into this very aggressive interest in gold from the investor side.”
Looking more closely at institutional influences, gold exchange-traded funds (ETFs) and central banks have both taken a shine to the precious metal lately. The amount of gold held by these ETFs stood at 88 million ounces in late March, increasing to 107 million ounces mid-year, according to our Interview with the former Newmont executive. Meanwhile, as at 2019, central banks had increased net bullion reserves for 10 consecutive years — a trend that continued in the earlier part of this year. However, there has been a slowdown overall in net purchases. Both sets of institutions have different reasons for buying bullion: investors using ETFs are more likely to be attracted to gold to hedge against inflationary pressures resulting from central banks’ actions, whereas central banks stock bullion to shore up against exchange-rate pressure.
Turning to the supply side, M&A could also be impacted by these higher prices. With stock prices bumped up, acquisitions are going to be more expensive — however, “positive for the M&A outlook is that the overall gold industry itself has had a tremendous lack of exploration success over the last two decades.” This means that producers are just moving “more and more dirt per ounce”. Consequently, “I think if there’s a good strategic fit that maybe a senior can come in and apply its exploration experience, its operating experience, to a junior, then those kinds of acquisitions may justify higher valuations and higher premiums”, said the Newmont executive.
A senior executive from Vector Resources also weighed in on the M&A outlook, focusing on the Australian market. To understand what kind of companies would be involved, they questioned why M&As would be taking place: “Is it driven by growth? Is it growth for growth’s sake? Is it trying to have, on a portfolio basis, a lower cost-per-ounce profile?” Although they admitted there could be little clarity on this, they thought it more likely that there would be activity from “mid-tier into junior, and junior and junior trying to jump up into mid-tier”, a view that contrasted with our previous specialist. There is little to be gained for the more established miners, as “they might get more ounces in their ounce portfolio, but they’re going to be higher-cost ounces.” In addition, during the past five to six years, the less developed market segment has been capital “starved” and, as a result “although they have appreciated, they’re still relatively undervalued”.
Pinpointing the regions with the most potential for M&A activity, the Vector Resources executive points to Western Australia, partly because of its relatively low incidence of COVID-19. Regarding permitting, “Western Australia, Queensland and Northern Territory are probably the three easier states, but compared to some other places in the world, it’s still pretty hard here.”
Another influence on the Australian gold market is the fact that the value of the AUD is more depressed relative to the USD than was the case during the global financial crisis. This creates an incentive to leverage earning potential. In the short term “the response will be to mine existing pit shelves, don’t mine any more waste and just go hell for leather and take as much value out of your mining as you can.” But, with planning windows generally reaching 12-18 months ahead, this could create issues in future as the cost of producing eventually creeps back up.
As with many industries, gold production has been affected in myriad ways by the coronavirus pandemic – but this is complicated by its attraction as a safe-haven asset. Among the clamouring for this precious metal by investors and institutions, companies must prepare for disruption. As a former VP from Newmont explained, “governments are going to change, they’re going to fall, there will be political movements, there will be instability in places due to the economic upheaval, and companies like Newmont are going to have to remain nimble”.
Related Transcripts
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
For any enquiries, please contact sales@thirdbridge.com
