The Gold price and the share prices of gold miners have been under heavy pressure, with miners in a deep, deep funk. Let’s discuss.
The South Deep Gold Mine is a key asset for Gold Fields and the flagship growth project in South Africa
Gold prices have lost their uptrend on two primary drivers:
- Inflation effects of QE began to be in question
- Sustainable growth globally meant equities were investible again and risk on means risk off gold
The Gold price is approaching 3 Standard Deviation move of the 100 day move average of approximately $1,577, which traditionally has served as a support. Price is setting up for a trading buy at a minimum.
Gold equities have been caught in this price move, but are also suffering from a more fundamental dynamic that comes from a lower gold price:
Many gold projects are unjustifiable at lower spot prices. Cheaper company multiples also mean that miners have less access to capital to fund their growth.
There is greater risks than ever before in the gold mining space due to political factors such as greater resource nationalism in Africa , Asia, Russia and because the grade requirements have gotten stricter.
Thus, many gold miners are transitioning from pure growth production/earnings to lower multiple yield plays.
What we have been seeing from players like Goldfields (GFI, quote), is that they are spinning off more speculative, higher cost assets and maintaining cash flow generative, lower risk assets in their primary portfolio.
Last week they announced a spinoff from GFI of Sibanye gold, which is a higher growth portfolio, but with higher risks/costs.
Other miners are following a similar strategy and this is leading to a place where investors are making a very different call when buying many gold miners today than they were last year or in the last decade.
How long will this transition take? …it won’t be a few months, but it will transform the industry.
Bottom Line: Country risks (political) and global macro dysfunction mean gold prices stay high. Investors need to begin to price in additional execution risks as well as asset risks.
Investors should reward more conservative players with projects that in friendly places like Australia, Canada and the United States.
Investors also need to look at companies who have already undergone significant restructuring and are now focused on finally pouring gold, or finally generating free cash flow, or players who have sold or will sell off less stable assets.
Conversely, stay away from companies with higher cash costs, riskier geographies, and impending feasibility tests that will make or break the valuation.