In the current volatile financial climate, the need to reduce one’s susceptibility against changing economic fortunes has become a top priority for investors. This is where the safe-haven appeal of gold becomes alluring and has always come to the rescue.
In contrast to more volatile stock market investments, gold has always been valued as a solid and dependable means to protect wealth. There are plenty of reasons to be optimistic about the gold mining industry for both the short term and long term. Below, we have discussed what investors in the gold mining sector can look forward to in the coming months and years.
Affluent Asia Will Continue to Drive Demand
In the last decade, combined demand for gold from India and China has soared 71%. These two markets roughly account for 54% of consumer gold demand, up from 33% in 2005. This figure is expected to go up to 60% in 2017.
Asia is now less economically dependent on the West and has shown relatively strong growth since the global financial crisis, despite persistently weak growth in the U.S. and Europe. India has a strong tradition of investing in gold, primarily in jewelry. Demand mostly increases around the wedding and festive seasons, which begin from mid-to-late August and continue until January. Expenditures on gold can account for almost 30% of a total wedding’s 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 medium for savings and diversification. Gold is embedded in China’s culture, and the Chinese New Year and weddings are key events for the country’s gold consumption. Although demand might have dropped from the highs of 2013, growth remains intact.
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 gaining popularity largely among the younger generation. Producers are also playing a key role in promoting these products given the higher margins.
The World Gold Council anticipates demand from China to grow at least another 20% by 2017. While China’s middle class is expanding, India 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 both these countries.
India’s gold industry suffered a setback last year due to the imposition of excise duty that prompted a strike in early parts of the year and the demonetization initiative in the fourth quarter that caused a liquidity squeeze that affected the entire economy. However, this year the Indian industry has returned to growth trajectory. A more transparent economy, expectations of bumper crop following a good monsoon will boost gold demand. The imposition of a General Sales Tax in mid-2017 nonetheless poses a short-term challenge to household gold buying.
Overall, the World Gold Council anticipates consumers to buy between 650 tons and 750 tons of gold during the year. This will grow year over year given the insatiable appetite for gold and the rising wealth of Indian consumers.
Macroeconomic trends in Asia will support economic growth in the coming years. In Asian economies, gold demand is generally closely correlated to increasing wealth and consequently will continue to support demand in the years to come.
U.S. Markets Hold Promise
Demand for gold jewelry in the first quarter of 2017 in the U.S was at 22.9 tons -- the strongest first-quarter since 2010 due to post-election lift in U.S. consumer sentiment. Economic growth, improving employment levels and growth in consumer confidence will continue to support demand.
Revived Appetite for Acquisitions
Goldcorp Inc. (GG - Free Report) and Barrick Gold Corp. (ABX - Free Report) recently signed an agreement to consolidate Caspiche and Cerro Casale gold projects in a 50-50 joint venture (JV). The deal will allow both companies to leverage potential synergies within the Maricunga Gold Belt, based in Atacama Region in northern Chile. Presently, Kinross Gold Corp. (KGC - Free Report) owns 25% interest in Cerro Casale and 100% in Quebrada Seca exploration project. It has agreed to sell these stakes to Goldcorp.
Goldcorp has also inked a deal to acquire Exeter Resource Corp. along with the fully owned Caspiche Project for around $185 million (on fully-diluted basis) in shares. The project is located in the Maricunga Gold Belt, adjacent to Cerro Casale. Once the deal is concluded, Goldcorp will include the Caspiche Project to the 50-50 JVin Cerro Casale. The JV will help Goldcorp to reduce around $85 million or 50% of acquisition cost from the $260 million deferred payment obligation under the agreement.
The JV has the potential to consolidate infrastructure capabilities and provide synergies in the form of reduced capital and operational costs. It will also reduce the environmental footprint of the company and increase returns. Both Barrick and Goldcorp will be able to combine financial and technical capabilities with these projects, increase net asset value per share and deliver value to shareholders and partners.
White Gold Corp. has entered into a binding purchase agreement with Kinross Gold to acquire the entities holding 100% of Kinross' properties in the White Gold District, Yukon. The acquisition will consolidate and expand White Gold’s already substantial land position in the White Gold District, and adds approximately one million ounces of gold grading between 2.7 to 3.19 g/t gold on the Golden Saddle area.
Canada’s Kirkland Lake Gold KL has bought Newmarket Gold Inc. in a bid to create a new mid-tier gold company with a market capitalization of C$2.4 billion ($1.83 billion) with the capability to produce over 500,000 ounces of gold annually.
Gold Miners Optimizing Portfolio
The decline in gold prices in recent years have 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 along with driving value across the portfolio.
Barrick Gold has been shedding non-core assets to optimize portfolio and strengthen balance sheet. The integration of its Cortez and Goldstrike mines in Nevada is on track. Further, the company optimized portfolio through the creation of distinctive new partnerships.
In early April, the company announced a partnership with Shandong Gold Group that will help generate more value from the Veladero mine in the short term, while potentially unlocking the untapped mineral wealth of the El Indio Belt in Argentina and Chile over the long term. It also announced the creation of a new JV with Goldcorp at the Cerro Casale project in Chile, and new exploration partnerships with ATAC Resources and Osisko Mining.
Gold’s Safe Haven Appeal
Gold has always been viewed as a metal of great 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 economic scenario is rife with all these factors.
Superiority Over Other Precious Metals
Gold’s worldwide acceptance as a medium of value sets it apart from other precious metals such as platinum, palladium and silver whose demand stems mainly from industrial applications. Gold is produced primarily for accumulation, while the other commodities are produced for consumption.
Moreover, in contrast to 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 above ground is easily interchanged with newly mined gold. This ensures the continuous demand of the metal for years to come.
Some Good Picks from the Industry
Golden Star Resources Ltd. (GSS - Free Report) , New Gold Inc. (NGD - Free Report) and Seabridge Gold Inc. (SA - Free Report) can be a solid addition to one’s portfolio. These stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Golden Star Resources has an expected earnings growth of 137.50% for fiscal 2017 and 105.26% for fiscal 2018. The company has delivered an average positive earnings surprise of 66.67% in the preceding four quarters.
New Goldand has a projected earnings growth of 57.14% for 2017 and 32.36% for 2018.
Seabridge Gold has a projected earnings growth of 14.29% for 2017.
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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