Large gold acquisitions mark an exciting time for gold stocks
For investors wishing to hedge the risk of a recession this year – there is a potential safe haven in gold. However, there is an alternative to outright purchasing bullion. Increasing concerns over geopolitical risks, excessive corporate debt levels and slowing economic growth, has caused markets to seek alternative ways to grow and protect capital, and being invested in gold stocks could be seen as a way to do both.
First, gold has an established history of being a vehicle to hedge against a stock market decline or recession, as gold prices tend to increase dramatically after a stock market crash.
Companies exploring and producing gold provide an attractive option to diversify a portfolio, especially in periods of high market volatility. What’s more, their underlying desire for revenue growth and higher profit margins allow for a more leveraged exposure to rising gold prices rather than purchasing bullion in of itself.
Second, companies with cash generative hard assets, tend to perform well when markets sell down riskier growth and tech stocks. Firms who are producing a tangible asset such as gold will not only provide a hedge, but will outperform as gold prices increase.
Both Goldman Sachs and JP Morgan are bullish towards gold prices this year, as geopolitical risks, slowing growth and recession fears, fuel demand for defensive assets.
Russ Mould, investment director of AJ Bell, argues that: because of the global upturn’s reliance on cheap debt, gold producers serve as “a welcome hedge” against any eventual downturn. He also noted that gold companies are “significantly undervalued” compared to gold bullion prices.
Interestingly, the recent Newmont-Goldcorp and Barrick-Rangold mega-deals reveal that there is a growing need for large gold miners to replace their reserves, which are decreasing faster than they can replenish.
James Wilson, a Perth-based analyst at Argonaut Securities Pty Ltd said: “When a million ounce producer can’t find growth options, then perhaps by merging with another one of the mid-tier miners they may see more investment appeal and more of a robust balance sheet,”
This may prove to be an interesting time for smaller gold companies, as large companies look for quick ways to acquire gold discoveries and increase mineral reserves.
There are a range of AIM listed companies who are focused on gold exploration and production:
4.78m mkt cap is a mining company focused on progressing its Kochang and Gubong gold mines in South Korea. Operations are lead by Charles Barclay, a specialist in re-opening old gold mines. The Gubong mine was once the second largest producing gold mine in the country, shut down in 1976 when gold was $40 per ounce.
4m mkt cap is a small cap explorer focused on Mali and Senegal. It has several drill ready targets in its portfolio, but remains focused on its highly prospective Sanankoro Gold Discovery, also located in the Yanfolila Gold Belt, Mali.
3.46m mkt cap is an Australian focused explorer, with a potentially large system in Creswick Victoria. It is currently diversifying its exploration efforts by now focusing on the Yilgarn Craton, which is host to approximately 30% of the world’s known gold reserves.
76m mkt cap is a resource exploration and development company with 6 gold projects across Western Australia and Tasmania. In particular, its Paterson project looks promising after drilling at Havieron yielded excellent results, and high-grade gold in rock chips and gold nuggets were discovered at Black Hills.
500m mkt cap is a Russian focused gold miner, a large AIM listed producer, with a total production of 269,500oz of gold in 2018, with 2019 production expected to be in the 290,000-300,000oz range. It has a large portfolio of mining assets in 3 prolific mining regions of Russia.
83m mkt cap, is an explorer and producer, with operations in Mali and an asset in Liberia. It has production target of 110,00-125,000oz of gold in 2019, after a significantly heavier than normal wet season required remediation works and caused its 2018 production at Yanfolila to be a slightly lower 87,000-92,000oz. It also has a 34% interest in Cora Gold.
10m mkt cap is an explorer with a focus on discovering gold deposits on the highly prospective long Archean greenstone belt in Canada. It is currently focused on developing its Junior Lake Project, where its BAM Gold deposit has revealed a Mineral Resource Estimate of 951,000oz.
45m mkt cap has a Gold Mine operation in Far East Russia. It produced 42,128oz of gold in 2018, with a production guidance of 40,000 to 44,000 set for 2019.
Large gold companies sometimes find acquiring smaller ones as an attractive proposition, as they often have complimentary assets, allowing them to beef up their balance sheet, increase their mineral resources, and sometimes carry forward the tax losses incurred by exploration.
In terms of supply, there has been decreased amount of gold produced and investment in exploration and new mine development in the medium to long term. This is against a backdrop of growing gold consumption continuing as demand for it increases in correlation with the growth of the middle class in China, India and other emerging markets.
Billionaire Equity International founder and creator of the real estate investment trust (REIT) Sam Zell, 77, told Bloomberg, “For the first time in my life, I bought gold because it is a good hedge,” he added: “Supply is shrinking, and that is going to have a positive impact on the price.
Individuals and large corporations alike are paying close attention to this age-old precious metal.
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