Gold miners are a 'top pick' in this crisis as gold price heads to at least $2,000, says Joe Foster
(Kitco News) - Gold producers collectively appear better positioned to weather an expected recession brought on by the COVID-19 pandemic than other sectors of the economy, said Joe Foster, portfolio manager of Van Eck International Investors Gold Fund (INIVX).
He cited their favorable balance sheets, current profitability and expectations for still-higher gold prices, suggesting the metal will top $2,000 an ounce. In fact, he said, most producers will probably maintain dividend payments.
Meanwhile, Foster does not look for a material impact on global mine production from a number of temporary closures around the world in response to the pandemic, assuming that mines reopen in the not-too-distant future and stay open.
Foster, who began his career as a geologist in the mining sector, has been with the Van Eck fund since 1996. The fund has $630 million in assets under management.
The financial press is full of stories these days about a spike in unemployment due to layoffs connected with COVID-19 lockdowns, with many industries in disarray. Gold producers appear to be in better shape than most other kinds of companies, Foster explained.
“The industry is probably better positioned than just about any industry to weather this crisis,” Foster said in an interview with Kitco News. “Balance sheets are healthy pretty much across the board. Debt ratios...are at a fraction of the average for the S&P 500. Financially, they’re in very good shape.”
Gold producers already went through a period of belt tightening and reducing debt when gold prices crashed several years ago, slashing their revenues. Since, gold has risen back above all-in sustaining costs for most producers.
“At $1,600 gold, all of these companies are generating a lot of cash, even through the shutdowns,” Foster said.
Against this backdrop, he suspects the gold-mining industry “is going to stand out as a top pick” when investors start trying to decide where to put their money after the recent shake-up in markets.
Meanwhile, he looks for gold itself to eventually go on to fresh record highs, with governments rushing to provide fiscal stimulus and central banks piling on monetary accommodation. Foster pointed out that gold was already in an uptrend before COVID-19 outbreak began.
“The outlook was pretty positive for gold before the crisis hit,” Foster said. “And now, with the extreme quantities of liquidity being pumped into the financial system, the outlook for gold is outstanding.
“The risks have increased almost immeasurably around the world. And if you look at the reaction of the central banks and the governments to this crisis, it creates more risk and the possibility of a severe inflationary cycle somewhere down the road….At a minimum, we’ll see new all-time highs of over $2,000 an ounce. And if some of the worst-case scenarios play out, gold could go much higher than that.”
Those possible worst-case scenarios include a prolonged recession rather than a V-shaped one, meaning potential for business failures and bankruptcies in other sectors, he said.
“If this virus lingers or we have a resurgence of the virus in the fall, people are going to get fed up and we’ll see more social unrest. In that kind of a scenario, with a tougher economic downturn, we could see gold prices go much higher,” Foster said.
“The central banks and authorities are not going to stop. They’ll keep pumping more into the system, in search of a recovery. You just can’t keep printing money. Eventually the system collapses.”
Temporary mine closures to have limited impact
The good news for producers so far this year has been higher prices that in turn mean higher revenues. The bad news has been the temporary closure of mines in regions such as Argentina, Mexico, Quebec and others. Most shutdowns were prompted by government rules to restrict people-to-people contact and stem the spread of COVID-19.
Still, Foster expects the damage to the industry to be limited. He estimated that only somewhere between 10% and 15% of production is offline right now. Most of these operations have been temporarily halted for between two weeks and four weeks, although there is the potential for these closures to be extended.
“But assuming the virus runs its course over the next month or two, overall, I don’t think it’s going to have a material impact on the full-year [global] production.”
Of course, that will vary from company to company, as some remain at full production while others have 80% of their output offline, he pointed out.
Focus during earnings season to be guidance
Foster looks for gold-mining companies to be profitable when the next round of quarterly earnings reports begins late this month and continues into May. Nevertheless, the first-quarter results could also be “messy” due to the temporary mine closures, leaving some uncertainty about the second quarter, he continued. As a result, the portfolio manager hopes companies will gives some clues or “scenario analysis” on what to expect going forward.
“They’ll all be profitable. But you’ve probably already seen half of the companies withdraw their guidance so far,” Foster said. Thus, he later added, “I’m not focused on the results as much as I am on the guidance for the rest of the year.
“I would expect them to give us an idea [of what to expect]. I don’t expect them to give us concrete guidance [saying] our costs are going to be this or that … For example, if we are missing 10% of our production over the course of the year, what would our financials look like?”
Companies in other sectors of the economy may be under pressure to halt share buyback and lower or eliminate dividends as they try to keep afloat, especially those that are looking for government bailouts. But this should not be a major issue for gold producers, Foster suggested.
“It wouldn’t surprise me to see, out of caution, a company suspending their dividend temporarily,” Foster said. “But outside of that, I would be very surprised to see a gold company cut its dividend because of this.”
Gold-mining mergers could accelerate
Assuming gold prices climb as most analysts expect, Foster sees potential for a pickup in mergers and acquisitions.
“We haven’t had as much M&A among the developing companies in this cycle as we’ve had in past cycles. So I think with a higher gold-price deck, we’ll see what remains of the developing companies get picked off by the many of the larger companies,” Foster said.
“I think we’ll see a continuance of the mid-sized companies merging to create critical mass and become more substantial companies, similar to what we’ve seen recently with Endeavour [Mining] and SEMAFO Inc.”
Endeavour and SEMAFO announced a friendly all-stock merger last month to create a company that expects to produce more than 1 million ounces of gold a year.