Canadian Miners Rethink Corporate Strategy as Gold Prices Reach an All-Time High

FINANCE TODAY | ISSUE NO.5

Currently, the gold industry is seeing massive success accompanied by a peak in investor interest, as the market price of bullion (gold stored in the form of bars, ingots, or specialized coins) has reached an all-time high. On July 27th, gold futures traded upwards of $1,940 USD an ounce which broke the previous record of $1,920 USD an ounce back in September 2011 (McGee, 2020). The gold industry has seen increased profitability due to increased volatility in many financial markets during the COVID-19 crisis, as it is typically a safe asset which investors flock to in uncertain times. Characteristics such as historically low interest rates, the U.S. dollar losing its buying power, and increased tensions between China and the United States have all played their part in benefitting bullion (McGee, 2020).

This kind of success is not uncommon within the Gold industry, as recent history shows. The gold market has a trend of flourishing amidst periods of struggle. A graph of gold prices set by the London Gold Fix has been provided below to illustrate the growth of the Gold industry:

The industry is currently experiencing a bull market, a market in which the price of an asset rises continuously over time, boosting investor confidence and overall increasing demand for the asset. The first incidence of a bull market in the gold industry was the early 2000s up until late 2011. This bull market was the result of an increase in demand for gold as a method of storing wealth. This was due to stock prices and the value of cash being very volatile during the later 2000s in the aftermath of the 2008 mortgage crisis. Throughout the first bull market, players within the industry made mistakes which led to the industry losing value again over time. At the time, senior mining companies such as Barrick Gold Corp., Goldcorp Inc., and Kinross Gold Corp. all invested tens of billions into mergers and acquisitions (M&A) which did not work out as expected (McGee, 2020).

Since late 2018, the industry has been witnessing another bull market. This time around, mining companies are looking less towards capital expenditures as part of their corporate strategies. The M&A happening more recently undergo a longer negotiation timeline before coming to a final closing. As an example, Teranga Gold Corp. and Barrick spent a year in talks before finalizing a deal which saw Teranga purchase Barrick’s Massawa gold project in Senegal for $380 million USD (McGee, 2020). In place of M&A, mining companies plan to promote growth organically through introducing new projects which have now become financially feasible due to the rising gold price. Experts anticipate a divide in relation to future strategies being implemented by mining companies. Joe Foster, manager of the VanEck International Investors Gold Fund expects a “bifurcation” to occur within the industry, with some companies taking a cautious approach and putting low-cost mines into production while other companies treat the rise in gold price as an opportunity to fund lower margin projects (McGee, 2020). In this bull market, companies are also expected to payout a larger portion of earnings to their shareholders, with some companies like Yamana Gold Inc. having already begun to increase dividends paid out.

132% from 2003 to 2012 (Washmonthly, 2018). 3D printing is also the solution to cheaper and more efficient production. Generally, for about $1500.00 CAD, a desktop 3D printer can eliminate the need for a foreign worker, and the product can be produced domestically (Washmonthly, 2018). A bull market phenomenon provides a potential opportunity for investors looking to expand or diversify their portfolio. Buying and holding gold securities has the potential to yield high rewards for investors as the goal would be to sell their securities at the peak of the bull market. Seeing as we are currently in the midst of the bull market, it will be very difficult to predict when the peak would occur, which is where the majority of the risk factor associated with this strategy underlies. This type of risk may be mitigated using a retracement strategy, where the main goal of which is to purchase a security as a retracement is observed in order to get in at a lower price. To clarify, a retracement is any period in which the trend in a securities price is reversed briefly. An example of a retracement can be seen on the graph above in June of 2008, with a small pullback occurring before a large rally. With this strategy, the price of the security (bullion in this example) is expected to rise again quickly, so waiting until a retracement to purchase a security can be likened to receiving the security at a discounted price. Something to keep in mind is that a bull market by nature creates an environment where investors are avidly looking to purchase the security but simultaneously will be hesitant to sell due to supply being low and demand being high. Regardless, if feasible, then purchasing gold securities may be a sensible investment to make at the moment there is potential for high returns. The future of the gold mining industry will be interesting to observe as gold companies’ revised corporate strategies begin to unfold over the coming months.

References

McGee, N. (2020, July 27). As gold hits all-time high, Canadian miners step back from its glare. Retrieved July 28, 2020, from https://www.theglobeandmail.com/business/article-as-gold-hits-all-time-high-a-new-conservatism-emerges-at-canadian/