Declining output from existing mines, geopolitical tensions, concerns over Brexit, China worries and delay in rate hikes is working 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 discuss what investors in the gold mining sector can look forward to in the coming months and years:
India, China Long-Term Growth Drivers
Over the last decade, combined demand for gold from India and China has risen 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 increasingly popular, with the latter largely gaining popularity among the younger generation.
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.
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.
U.S Markets Hold Promise
In the second quarter of 2016, demand for gold jewelry in the U.S. went up 1% year on year – the tenth consecutive quarterly increase. Demand in H1 at 48.6 tons was the strongest since 2009. Consistent, albeit moderate economic growth, improving employment levels and growth in consumer confidence are supporting demand.
Revived Appetite for 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 acquired Kaminak Gold Corporation. Kaminak's primary asset is the wholly owned Coffee Gold project – a hydrothermal gold deposit located at Yukon. This project has considerable potential for near-mine discoveries, with mineralization remaining open along strike and at depth.
The Coffee gold deposit currently has total indicated gold mineral resources of 3 million ounces and total inferred gold mineral resources of 2.2 million ounces. 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.
Seabridge Gold, Inc. (SA - Snapshot Report) acquired SnipGold and its Iskut project which is a gold-silver-copper project with measured and indicated resources of 2.16 million ounces of gold, 13.17 million ounces of silver, and nearly 502.7 million pounds of copper. Fortuna Silver Mines Inc. (FSM - Snapshot Report) acquired Goldrock Mines and its Lindero gold project in Argentina. The project contains 1.15 million ounces of gold.
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 along with driving value across the portfolio.
Newmont Mining Corp. (NEM - Analyst Report) sold Newmont Waihi Gold Limited in New Zealand to OceanaGold Corp. 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 Corp. (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 divested the Bald Mountain mine in Nevada to Kinross Gold Corp. (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. The current economic scenario is rife with all these factors.
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 above-ground is easily interchanged with newly mined gold. This ensures the continuous demand of the metal for years to come.
Gold is having a good ride this year on mounting global economic fears. This accelerated flight to safety makes investment in gold a prudent option at the moment.
Some Good Picks from the Industry
Estimates for Silver Standard Resources Inc. (SSRI - Snapshot Report) have moved up 37% over the past 60 days. The Zacks Consensus Estimate for 2016 is at 82 cents, a radical improvement from the loss of 10 cents per share in the prior year. The stock sports a Zacks Rank #1 (Strong Buy). You can seethe complete list of today’s Zacks #1 Rank stocks here.
Caledonia Mining Corporation Plc (CALVF - Snapshot Report) carries a Zacks Rank #2 and has witnessed upward movement in its earnings estimates over the past 60 days. The Zacks Consensus Estimate for 2016 is at 27 cents, a 238% improvement from the prior year.
Gold Fields Ltd. (GFI - Snapshot Report) carries a Zacks Rank #2 and its estimates for 2016 have moved up around 14% over the last 30 days. The stock has an expected earnings growth of a whopping 600% for the current year.
New Gold, Inc. (NGD - Snapshot Report) also flaunts a Zacks Rank #2 and has expected earnings growth of around 433.33% for the current year. The Zacks Consensus Estimate for 2016 has moved up 28% over the last 30 days.
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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