Declining output from existing mines, geopolitical tensions, a stock market rout, China worries and a possible delay in further rate hikes will work in favor of gold after years of languishing prices. There are plenty of reasons to be optimistic about the gold mining industry for both the short and the long term. Below, we have discussed what investors in the gold mining sector can look forward to in the coming months and years:
India, China to Be Long-Term Growth Drivers
Over the last decade, combined demand for gold from 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 from mid-to-late August and continue 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 for the country’s gold consumption. In China, although demand might drop 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 largely gaining popularity among the younger generation.
The World Gold Council expects 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.
China’s central bank also continues to purchase the precious metal on a monthly basis, as it sees value in diversifying in gold. People’s Bank of China (PBOC) now holds a total of 57.18 million ounces of gold. Currently, China’s gold reserves are ranked fifth in the world, behind the U.S., Germany, Italy and France.
Growing U.S. Trend
In the first quarter of 2016, demand for gold jewelry in the U.S. went up 2% year on year – the ninth consecutive quarter of such an increase. The industry continues to benefit from retailers re-entering the gold segment. 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 lower oil prices are likely to lead to further improvements in this market over the coming quarters.
Revival in Acquisitions
Vancouver-based Tahoe Resources Inc.’s (TAHO - Snapshot Report) acquisition of Lake Shore Gold Corp. will address challenges faced by both companies. The transaction added Timmins West and Bell Creek mines in Timmins, Ontario, to Tahoe's holdings, which include mines in Guatemala and Peru. The enlarged 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.
Goldcorp Inc. (GG - Analyst Report) has inked a deal to acquire Kaminak Gold Corporation. The total consideration offered for all of Kaminak's outstanding shares is roughly C$520 million. The acquisition is in sync with Goldcorp’s strategy of aligning with smaller exploration companies to identify and develop mining districts with large exploration potential that can grow its net asset value per share.
The Coffee Gold project is located within a politically stable jurisdiction and gives Goldcorp an opportunity to add high quality ounces to its development pipeline, at low all-in sustaining costs. The project will create lasting positive benefits for local First Nations and communities of Goldcorp.
Gold Miners Optimizing Portfolio
The drop in gold prices in recent years had put the gold mining companies' bottom lines under pressure. The companies were 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 Corporation (NEM - Analyst Report) sold Newmont Waihi Gold Limited in New Zealand to OceanaGold Corporation OCANF. 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 its shareholders.
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 cash flow generation.
Barrick Gold Corporation (ABX - Analyst Report) is also shedding non-core assets to optimize its portfolio and strengthen its balance sheet. The company, in late 2015, completed the sale of a 50% interest in the Zaldivar copper mine in Chile to Antofagasta Plc. and also closed the divestment of its 70% interest in the Spring Valley project and its 100% interest in the Ruby Hill mine to subsidiaries of Waterton Precious Metals Fund II Cayman, LP.
Moreover, the company wrapped up the sale of its 50% interest in the Round Mountain mine and 100% of the Bald Mountain mine in Nevada to Kinross Gold Corporation (KGC - Analyst Report) earlier this year, receiving $610 million in cash for these non-core assets. Barrick reduced its total debt by 24% in 2015, exceeding its original debt-reduction goal of $3 billion.
Gold’s Safe Haven Appeal
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. And there is no dearth of these factors in the current economic scenario right now.
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 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. This ensures the continuous demand of the metal for years to come.
Gold is having jolly good ride this year on mounting global economic fears. This accelerated flight to safety makes investment in gold a prudent option at the moment.
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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