The Time to Reap a Golden Harvest Is Now! — Gold Mining Industry

The Time to Reap a Golden Harvest Is Now! — Gold Mining Industry

Wow! Are we into the new financial year already?

It sure goes fast.

OK…maybe not if you were in gold stocks over the last 12 months.

Precious metals mining stocks ended up a bit worse for wear. The chart below shows the ASX Gold Index’s [ASX:XGD] performance:

ASX Gold Index

Source: Thomson Reuters Datastream

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The ASX Gold Index fell 23% over the year.

At its lowest in early March, the index was down 30%.

But this is not the time to despair and give up on buying gold stocks!

The gold mining industry is actually looking stronger than ever.

I should know, I track it every day.

Remember, we saw the price of gold rise significantly in 2019. It brought gold producers to new highs. They experienced better profit margins and increased their cash balances.

I expect a rerun of this scenario in ‘FY22’!

I also expect lots of industry consolidation and mergers in the coming year.

Let me explain why…

Right now, mining costs also increased a fair bit along with the rising price of gold in the last few years.

Very few gold producers escaped this.

The graph below, which I compiled, shows the average quarterly production and ‘All in Sustaining Costs’ (AISC) of these companies:

ASX Gold Producers

Source: Brian Chu

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You can see that the average AISC rose significantly after the price of gold rose in mid-2019.

It continued into 2020 as a result of the virus-induced lockdowns that limited mining activities.

You can also see the rising trend in average production. It is less pronounced than the rising AISC.

What is causing these trends? Let us look deeper.

REVEALED: What’s Next for Aussie Gold Stock Prices? Learn more.

Industry consolidation

The larger industry players have seen a clear decline in their mines’ ore grades, leading to lower production.

They have two choices — explore or buy new deposits or mines to grow.

The latter is a faster but more expensive option. Several company boards opted for the latter.

You saw several major acquisitions and mergers in the past year.

This includes the Northern Star Mines Ltd [ASX:NST] and Saracen Mineral Holdings Ltd [ASX:SAR] merge, to form the third-largest gold producer on the ASX in 2020.

Also, Alacer Gold Corp [ASX:AQG] merging with SSR Mining Inc [ASX:SSR] in 2020, Regis Resources Ltd [ASX:RRL] purchasing a 30% stake of the Tropicana Mine from IGO Ltd [ASX:IGO] in April this year, and Evolution Mining Ltd [ASX:EVN] purchasing the Canadian developer Battle North Gold Corp [TSX:BNAU] in March this year.

With this type of consolidation comes significant integration costs. There may be synergies in the longer term, but first comes some pain of cutting redundant staff, merging different companies’ administrations, and also the hidden costs of merging two company cultures.

Then you also have the costs associated on the mine sites.

Several company mergers and mine acquisitions involve bringing undeveloped mine deposits into production.

The rising trend in the average production is partly due to companies buying existing mines and adding to their existing production.

The industry consolidation in the last three years has been handled better this time by management than it was in the last gold rally from 2009–11.

Adrian Day of Adrian Day Asset Management criticised management of gold companies in the past for spending like drunken sailors and hurting shareholders. He has recently been more forthcoming with praises instead.

I agree with him. There are some purchases I have seen that are overpriced. But on the whole, these have been exceptions rather than the rule.

The companies have better balance sheets this time too. Less debt and more cash in the bank to weather the storm.

You are now beginning to see the fruits of some of these labours.

What it means to you?

The gold mining industry is going through some major changes as companies look to beef up their mine portfolios.

Mining costs are rising. This could continue as the price of oil has doubled since late last year.

However, the companies are generally in better shape than ever.

Part of the reason gold stocks underperformed over the last year was that this type of consolidation period was going on as the gold companies jostled for assets and streamlined their costs as much as possible. The price of gold cooled too in the US.

However, think of the long term. Gold companies can now sweat their assets at very good margins with Aussie dollar gold at around $2,350.

My analysis says the upcoming three-month period is, historically at least, very bullish for gold stocks usually on the ASX.

And that 20% decline over the last financial year?

I call that a discount.

I’m buying. Are you?

God bless,

Brian Chu Signature

Brian Chu,
Editor, The Daily Reckoning Australia

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