Mining Mergers Suggest Continued Momentum for Gold

Brandon Green | févr. 4 2019, 5:00:00 am

Gold continues to trade above US $1,300 per ounce mark, amidst speculation regarding the implications of recent merger activity in the sector. The recently announced Goldcorp/Newmont and Barrick/Rangold mergers make sense from a variety of points of view. Continued low interest rates mean that it’s cheaper to buy your competition than it is to fight them.

Mining Mergers Suggest Continued Momentum for Gold

Gold continues to trade above US $1,300 per ounce mark, amidst speculation regarding the implications of recent merger activity in the sector.

The recently announced Goldcorp/Newmont and Barrick/Rangold mergers make sense from a variety of points of view. Continued low interest rates mean that it’s cheaper to buy your competition than it is to fight them.

Furthermore, anytime a company can streamline operations by bringing down selling, general and administrative expenses, it’s a good thing for shareholders.

That said, despite their tough reputations, business executives hate cutting jobs and salaries. It’s even harder in the gold industry where relationships run deep.

When CEOs start trimming the fat, you know something is up.

Miners having trouble growing earnings at current prices

Ronald Theissen, CEO of Northern Dynasty, which is currently attempting to develop the massive Pebble Project in Alaska, thinks that increased merger activity in the gold sector is bullish for holders of undeveloped ore bodies.

If he is correct, this would suggest that the implied value of physical gold is also higher.

A key factor underlying recent mergers relates to the increasing challenges that miners are having in making money at current gold prices.

For example Newmont and Goldcorp recorded quarterly losses in their most recent earnings announcements.

While many major mining companies – including Newmont and Goldcorp - report “all in-sustaining costs of less than a $1,000 per ounce these figures can be deeply misleading.

For one there are no agreed upon standards for calculating them. As such, all-in-sustaining cost totals often don’t fully account for the vast sums of money that the industry spends in exploring for and developing new resources.

Worse, in some cases, those all-in-sustaining costs are calculated after certain expenses related to the mines in question have been written down, or they incorporate questionable “high-grading” mining practices.

Furthermore, as long-time professionals like Brent Cook, co-editor of Exploration Insights note, high-quality ore bodies are getting increasingly harder to find and often take more than a decade to permit and get into operation.

Several bullish trends for gold

The increased mining sector merger activity is taking place amidst several other important trends that are bullish for gold.

For one, while the yellow metal remains off its post-financial crisis highs in US dollar terms, prices are now more 20% higher than during their November 2015 bottom.

In fact, in many emerging market currencies gold is hitting new highs. Gold is even performing well in advanced economies such as Canada and Australia.

The picture in the United States also appears to be improving. US Federal Reserve Governor Jerome Powell made famously dovish comments earlier this month, after buckling into unrelenting pressure from the White House.

This was followed by a Wall Street Journal report that the US central bank is considering ending its balance sheet contraction sooner than expected.

Continued interest by global central banks is also a factor. For example China recently announced that it has boosted its official reserves for the first time in two years and that its holdings of U.S. Treasury securities fell for a fifth straight month.

Russia, which is also seeking to decrease reliance on the US dollar, increased its gold reserves during 2018 to 2,112 tonnes, vaulting it into the top five countries in terms of gold holdings.

Back into a longer-term bull market?

That said, it remains far from clear whether gold itself is poised to re-enter a longer-term bull market in US dollar terms as well.

While the yellow metal has made significant progress during the past two years, it will encounter significant resistance in the $1,300 to $1,350 range. If it manages to break through those levels, the picture going forward could be clearer.

Yet while these developments are important for gold traders, they matter less to holders of physical gold, who tend to view their investments in much longer terms.

For them, their main decision is whether to hold a portion of their wealth in an asset that has kept its value for millennia, or whether to place their trust in paper issued by central banks.

Brandon Green oversees business development and economic research at Strategic Wealth Preservation.

bg@swpcayman.com

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