Gold analysis: The miners are showing value
The valuation gap between gold equities and gold bullion has widened further. Gold prices are up 11.4% year-to-date, yet the GDX Index is up only 6.4%.
Gold reacts to the Federal Reserve, dollar strength
Gold gave back some of its July gains during the month of August. Markets continued to focus on the US Federal Reserve’s (Fed’s) path. Indications that Fed policy may remain tighter for longer, with the potential for another hike this year, supported a stronger dollar and higher bond yields, which put pressure on gold prices. The US Dollar Index (DXY) was up 1.7% in August, and the US 10-year treasury yield touched a high of 4.34%, its highest level since 2007. Gold fell below US$1,900 per ounce, trading at a low of US$1,889 on August 18, with persistent outflows from gold bullion exchange traded funds during the month. But once again, gold showed resilience, climbing back above US$1,900 only a week later. Towards month-end, reported declines in US consumer confidence and job openings reduced the implied probability of a Fed hike this year. With treasury yields and the dollar easing, gold found some support to close at US$1,940 per ounce on August 31, posting a loss of $25 per ounce (-1.3%) for the month.
Gap remains for gold miners
The NYSE Arca Gold Miners Index (GDX Index) fell 2.44% in August. The valuation gap between gold equities and gold bullion widened further. Gold prices are up 11.4% year-to-date, yet the GDX Index is up only 6.4%. We have been emphasising that gold equities are trading at a discount relative to gold and that they are trading at historically low multiples. An analysis by Paradigm Capital for a universe of large and intermediate gold producers found that based on consensus expectations, gold miners are trading at a 2024 EV/EBITDA ratio representing about a 35% discount to their 10-year historical average. For reference, the S&P 500 Index is trading at a 2023 EV/EBITDA ratio that is over 10% above its 10-year average, and even with estimates coming down for next year, the 2024 EV/EBITDA consensus ratio is right in line with the 10-year average. With gold prices near all-time highs, we think investors should look at gold mining equities and consider the sector’s potential for future stock price appreciation, as compared to other industries.
Focus on Australian miners
We recently met with the management teams of eight companies and toured six major gold mining operations, including open pit and underground mines. We were impressed with the size and scale of some operations (e.g., Boddington), and the richness in grade of others (e.g., Bellevue and Fosterville). Across the board, we noticed a focus on the latest technology, mining techniques and efficiencies, as well as a focus on Environmental, Social and Governance (ESG)-related subjects. In our view, Australia remains a leading mining jurisdiction, both in terms of potential and investability. Key issues that we discussed with management teams include the focus on de-carbonising energy usage, skilled labour shortages, and the role of technology in mining to reduce costs, improve efficiency and make mining safer for workers.
For context, Australia was the second (tied with Russia, and only slightly behind China) largest producer of gold in 2022—mining over 10% of the world’s annual supply according to the United States Geological Survey. On a reserve basis, the country is reported to have over 16% of the world’s in-ground gold. During our trip, we visited mines representing approximately 22% of Australia’s annual gold output. Increased exploration efforts, regional consolidation leading to efficiencies of scale, continued focus on optimisation and cost control along with historically high gold prices should contribute to a vibrant gold mining industry for the foreseeable future.
Here are some of the key takeaways:While raw material input prices now appear to be receding, skilled labour shortages in Australia continue to impact both costs and volumes, despite the reversal of COVID-related impacts last year.
- High bulk material prices (iron ore, coal, lithium) and government-funded project stimulus have sharply increased competition for skilled labour. This has led to higher wages in the mining industry as companies raise salaries to retain or attract talent, including for those candidates coming right out of university.
- Fly-In-Fly-Out operations, largely in Western Australia (e.g., Bellevue and Gruyere), facilitate ‘mercenary’ type labour behaviour. For example, miners, mechanics and engineers based near Perth, can chase the highest compensation without having to move or relocate their families.
- Operations located within driving distance of major population centers (e.g., Boddington, Fosterville) benefit both from lower labour rates and lower turnover.
- Gold miners are attempting to meet this labour challenge through aggressive recruiting/hiring, training of recent university graduates in adjacent fields (such as civil engineering) and through automation and technology.
Australia leads the industry in technology, with remote control and automated vehicle adoption set to drive continuous improvement in costs, production and safety.
- At Fosterville and Cowal, we had the opportunity to visit the control room and observe above-ground operators controlling vehicles operating underground. This technology is deployed when ground conditions present a safety concern for workers and utilized during shift changes to smooth operations and maximise volumes.
- The most striking technology adoption we witnessed was at Newmont’s Boddington operations. There, we saw the largest automated haul fleet in the gold industry. Boddington is currently operating 35 fully automated Cat®793 (400-ton) haul trucks and expects to increase the fleet to 40. The full benefits realised by Boddington’s automated fleet compared to a conventional fleet have yet to be quantified, but we expect the gains to be significant.
- At Gruyere, a 50/50 Joint Venture between Gold Fields and Gold Road, management is considering automating their drill fleet to both gain efficiencies and reduce labour costs. Operations have been recently hampered by a lack of drilling capacity.
- At Fosterville and Boddington, vehicles were monitored and always tracked, including vehicles operating underground, which is something we have not seen before. While this should benefit safety performance, we would also expect improved operating performance and longer equipment life.