Few can resist gold’s allure. Its attributes -- including malleability, resistance to corrosion and tarnishing, and of course its shimmer -- make it ideal for all kind of jewelries. However, gold’s value goes beyond this as it is also a ripe investment option. Investors buy gold bullion and official coins as a hedge against inflation or a safeguard against the collapse of paper assets such as stocks, bonds and other financial instruments.
After years of depressed prices, gold’s outlook has started looking up as a result of declining output from existing mines, geopolitical tensions, a stock market rout, China worries and a possible delay in further rate hikes. There are plenty of reasons to be optimistic about the gold mining industry for both the short and the long term. Below, we discuss some of the key reasons and what investors in the gold mining sector can look forward to in the coming months and years.
India and China Spurring Demand
Over the last decade, combined demand for gold in India and China has grown 71%. Last year, these two markets accounted for 54% of consumer gold demand, up from 33% in 2005. India has a strong tradition of investing in gold, mainly in jewelry. Demand mostly increases around the wedding and festive seasons, which begin during mid-to-late August and continues until January. Expenditure on gold can account for almost 30% of the total wedding cost. This gives a boost to local currency demand and raises gold prices.
In China, people view gold -- whether in the form of bars, coins or jewelry -- as a natural vehicle for savings and diversification. Gold is embedded in China’s culture and the Chinese New Year and weddings are key events in the country’s gold consumption.
The outlook for gold in India remains healthy, particularly given upward revisions to GDP growth and retail demand, which continues to be supported by festive buying. In China, although demand might drop from the highs of 2013, growth remains intact. The People’s Bank of China has increased its gold reserves by 57% since 2009. A continuous shift toward higher-margin products has lately been observed in the Chinese jewelry market. Gem-set and 18-carat gold items are becoming increasingly popular, with the latter largely gaining popularity among the younger generation.
The World Gold Council expects demand from China to grow at least another 20% by 2017. China’s middle class is expected to grow and India also has a comparatively low level of per capita gold holdings. The powerful combination of increasing urbanization and strong cultural affinity for gold bodes well for the metal’s demand in India and China.
China’s central bank continues to see the value of diversifying into gold as it continues to purchase the precious metal on a monthly basis. People’s Bank of China (PBOC) added 580,000 ounces of gold to its official reserves in January. The bank now holds a total of 57.18 million ounces of gold, a 0.9% sequential increase. Currently, China’s gold reserves are ranked fifth in the world, behind the U.S., Germany, Italy and France.
Growing U.S. Trend
Jewelry demand in the U.S. continues to trend upward. Rising household wealth is also providing support. Some promising trends, like a continued shift from 10-carat toward 14-carat jewelry, and responsiveness among consumers to targeted marketing campaigns, continue to emerge. Growth in consumer confidence and the slump in oil prices are likely to lead to further improvements in this market over the coming quarters. Retailers show a widespread conviction in the underlying growth trend.
Revival in Acquisitions
Last year was witness to a flurry of M&A activities in the space. One of them being Goldcorp Inc.’s (GG - Analyst Report) eye catching all-stock deal valued at $526 million to buy Toronto’s Probe Mines Ltd. and scoop up one of Canada’s most promising new gold discoveries in northern Ontario.
Newmont Mining Corp. (NEM - Analyst Report) closed the acquisition of Cripple Creek & Victor gold mine in Colorado from AngloGold Ashanti Ltd (AU - Snapshot Report) for $820 million, and a 2.5% net smelter return royalty on potential future gold production from underground ore. The acquisition represents an opportunity for Newmont to improve mine life. Also, the company believes that with this acquisition it can add profitable gold production and save direct mining costs by up to 10% through improved productivity and optimization.
Canadian mid-sized miners Alamos Gold Inc. (AGI - Snapshot Report) and AuRico Gold Inc. (AUQ) merged to create a significant mid-tier producer that can withstand low gold prices. Cost synergies from the merger will help to lower costs.
This year, Vancouver-based Tahoe Resources Inc.’s (TAHO - Snapshot Report) friendly deal to buy Lake Shore Gold Corp. (LSG - Snapshot Report) is being viewed as a logical transaction that will address challenges faced by both companies. The proposed combination, which values Lake Shore at about $945 million, would add the Timmins West and Bell Creek mines in Timmins, Ontario, to Tahoe's holdings, which include mines in Guatemala and Peru.
The new company is expected to produce 370,000–430,000 ounces of gold in 2016 at total cash costs of $675–$725 per ounce and all-in costs of $950–$1,000 per ounce. Last year, Tahoe had bought a smaller rival Rio Alto Mining to expand its presence in Latin America.
Gold Miners Optimizing Portfolio
The drop in gold prices in recent years has put the gold mining companies' bottom lines under pressure. The companies are actively pursuing opportunities to optimize their portfolio, including the divestiture of certain non-core or non-productive assets and reduction of debt, maximization of return on capital and driving value across the portfolio.
Newmont Mining sold Newmont Waihi Gold Limited in New Zealand to OceanaGold Corporation. The sale agreement included a US$5 million contingent payment and a 1% Net Smelter Royalty on a recent discovery north of Waihi’s current operations.
Over the last two years, Newmont has generated $1.7 billion through non-core asset sales, allowing the company to reduce its debt, invest in profitable production and return capital to shareholders. In addition, the company lowered its all-in sustaining costs by 16% in the third quarter of 2015, compared to the prior year.
IAMGOLD Corp. (IAG - Snapshot Report) completed the sale of its Niobec mine to a group of companies led by Magris Resources Inc. for cash proceeds of $500 million. This sale will increase IAMGOLD’s liquidity position, thereby strengthening its financial position over many of its competitors. Goldcorp had sold its 26% stake in Tahoe Resources for just under $1 billion in order to focus on increasing cash flow.
Barrick Gold Corporation (ABX - Analyst Report) had announced asset sales, joint ventures and partnerships worth $3.2 billion in 2015, allowing the company to achieve its debt reduction target of $3 billion for the year. Barrick is also focused on improving its liquidity and the portfolio of its core mines that drive free cash flow.
In line with this, Barrick Gold completed the sale of 50% of its interest in the Round Mountain mine and 100% of the Bald Mountain mine to Kinross Gold Corporation. Barrick and Kinross have also completed the formation of an exploration joint venture covering a large land package on the Bald Mountain property. Barrick has received $610 million in cash for these assets.
Gold — a Safe Haven Investment
Gold has always been viewed as a store of value and a safe-haven asset. The buying of gold is a hedge against inflation, macroeconomic, geopolitical, systemic and monetary risk. This trend intensifies during periods of economic turmoil and geopolitical tensions. The current environment of macro uncertainty is particularly helpful for gold.
Superiority Over Other Precious Metals
Gold’s worldwide acceptance as a store of value sets it apart from other precious metals such as platinum, palladium and silver whose demand stems mainly from their industrial applications. Gold is produced primarily for accumulation while the other commodities are produced for consumption.
Moreover, in contrast to the other commodities, gold does not perish, tarnish or corrode, nor does it have quality grades. There has not been any material change in gold’s quality over the years; gold mined thousands of years ago is the same as today. Gold existing aboveground is easily interchanged with newly mined gold. Hence, its demand will remain strong in the years to come.
Bottom Line
As you can see, there is no shortage of reasons to be optimistic about the gold mining industry right now.
Check out our latest Gold Mining Outlook for more on the current state of affairs in this market from an earnings perspective, and how the trend is shaping up for this sector going forward.
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