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Mark Yu
Mark Yu
Articles (435)  | Author's Website |

Gold Miners Are Rejoicing

World's largest gold producers buy time with gold price climbing

September 12, 2019 | About:

The gold price has not seen these price levels in recent years.

This week's price action has caused some analysts to make a bullish call that the yellow metal could go to $2,000. At $1,500 per ounce for gold, gold miners — especially those that are highly efficient in their operations — could reap gains not seen in years. These miners benefit from improved gold prices that allowed them to sell their product at a higher price than it cost them to mine. Meanwhile, higher gold prices were the result of investors moving money into safe-haven assets (bonds, gold) amid tumult in other risk assets.

The gold price has been range-bound over the past five years and got a boost only this summer when it soared 15% to about $1,500 an ounce. This price increase came when the U.S. levied some of China's exports and China responded with retaliatory tariffs on U.S. imports.

Gold miners had already been on the receiving end of investor criticism related to poor capital management and shareholder returns in recent years.

To address these concerns, Canada’s Barrick Gold bought Randgold for $6.5 billion in September last year to create what would be the largest gold producer in the world at that time. Not to be outdone, Colorado-based Newmont (NYSE:NEM) acquired Goldcorp for $10 billion early this year, making the newly formed company the world’s biggest gold producer with production expectations of 6 million to 7 million ounces of gold annually for the next decade.

Gold-producer shareholders could not have been more thankful for the mega-mergers, as share prices of the miners have handily outperformed broader markets since their merger announcements.

Barrick Gold shares are up 81% over the past 12 months, while Newmont is up 32% for the same period.

Barrick Gold seems to have been rewarded more by the market for its cost-effective operations. Per recent filings, the company’s all-in sustaining cost stood at $825 per gold ounce, while its bigger peer Newmont reported $1,016 an ounce. (These figures may not be an exact apples-to-apples comparison because both companies have these cost figures under their corresponding non-GAAP reports.)

Barrick Gold also met earnings expectations in its recent quarter, while Newmont is still unable to fully use all of its mining operations post its gigantic merger held early this year. Nonetheless, both companies have maintained healthy balance sheets since their big acquisitions.

The adjustments and restructurings associated with mega-mergers could not have been more perfectly timed with gold price’s recent ascent. Up 17% so far this year, the gold price is on track to reward not only the gold bugs out there but also gold miner investors.

Now trading at high multiples not seen in years, early believers in the mega-mergers should probably start taking some chips off the table rather than continue to bet on more market volatility in the coming months.

Disclosure: No stock in any of the companies mentioned.

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About the author:

Mark Yu
I'm a doctor in physical therapy (DPT) with an interest in finance. Not a registered financial analyst. Value seeker. Long only. Global investing. Long-term investing.

I attempt to dissect one company filing every day. I dislike goodwill and intangible assets.

One company (review) a day keeps the speculation (hopefully) away.

"The only source of knowledge is experience."

"I have no special talent. I am only passionately curious." - Albert Einstein

"To strive, to seek, to find, and not to yield." - Alfred, Lord Tennyson

"We find one a year, that's terrific. You do not need a hundred or a thousand great investment ideas to do well. You need a couple. And, the discipline is the most important thing." - Warren Buffett

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