Despite strong fundamentals, major gold miners’ valuations remain low - report
(Kitco News) - According to a report by Metals Focus, a leading independent precious metals research consultancy, the major gold miners’ valuations remain low despite falling debt and rising dividends.
In its recent study, Metals Focus found that net debt for the peer group has fallen from a peak of US$32bn in 2013 to its present level of US$6bn. Improved margins, thanks also to a rising gold price, has allowed companies to boost dividends and in some cases start share buy-back programs, the consultancy pointed out.
However, despite these financial metrics improving, the sector’s rating has lagged. The weighted average enterprise value/EBITDA and the adjusted price to earnings ratio in Q2.21 were close to their lowest levels in Metals Focus’ records going back to 2009.
This suggests that these companies are undervalued relative to historic levels despite strong fundamentals. These relatively low valuations are the result of several factors including declining production, cost inflation and environmental concerns, the authors of the report noted.
“Production for the peer group has been falling consistently, by about 8% since 2014. With the emphasis on cash flow, following the end of the last gold bull market in 2012, gold mining companies cut exploration spend, and all forms of capex to a minimum, as well as trimming on-going cash costs,” Metals Focus said.
This falling production trend is indicative that cost cutting has led to lower output. “Gold mining companies must reinvest to maintain production levels,” the consultancy added. “However, our analysis suggests investment has not been sufficient to sustain output.”
But it does appear that mining companies are starting to increase levels of reinvestment to counter the drop in production. Unitised capital expenditure has increased one third over the last year, Metals Focus said.
The weighted average cash costs for the peer group has been gradually increasing since Q1.16. However, this cost growth has accelerated since end-2020, driven by a number of factors including weakening of the US dollar to local producer currencies, additional costs relating to the COVID-19 pandemic, falling grades and inflation of input costs such as labour and power.
According to the report, this combination of declining production and rising costs appears to be negatively impacting share valuations of the peer group.
Meanwhile, Metals Focus said that over recent years there has been increasing scrutiny on the environmental footprint of the mining industry in general and gold mining has been no exception. In particular, there has been a focus on Greenhouse Gas (GHG) emissions associated with mining.
The consultancy said that its Gold Peer Group ESG Analysis report shows that gold mining companies typically emit one tonne of carbon dioxide equivalent for every ounce of gold produced.
“This, combined with the localised environmental impact of mining operations, has made gold miners unattractive to an increasing number of environmentally conscious investors, which is also likely also weighing on valuations,” Metals Focus noted.
However, the industry is making efforts to address this issue, the consultancy pointed out, as the two biggest gold miners in the world, Newmont and Barrick, have both announced targets to reduce GHG emissions by 30% by 2030 and achieve net zero emissions by 2050. Most major gold producers have announced similar targets, Metals Focus concluded.