Frankfurt. The US government's intervention in the bond market not only caused gold prices to rise - the shares of mining operators also rose significantly. Gold mining indices such as the MSCI Global Gold Miners and the Nyse Arca Gold Bugs rose by more than 30 percent in August, significantly more than gold, which rose by ten percent.
Although prices fell slightly at the beginning of September, a consolidation after a sharp increase is considered unsurprising. Could investors now have a good opportunity to get started?
Since the beginning of the year, gold mining indices have risen by almost a fifth despite two sharp declines at the outbreak of the Iran war in March and after the end of the ceasefire in June. Gold, however, has only risen by just under two percent since the beginning of the year.
The fact that gold mining stocks perform better than gold is not unusual and has to do with a leverage effect: If the price of gold increases but not the costs, the producers benefit disproportionately.
A calculation example: If the cost per ounce mined (AISC) is 1,000 US dollars and the price of gold is 4,000 US dollars per ounce, the mine operators have made a profit of 3,000 US dollars per ounce. If the price of gold rises by 25 percent to $5,000 per ounce, the mining companies' profits will rise by more than a third, to $4,000 per ounce.
The prerequisite for this is that expenditure per ounce produced (AISC) remains stable. But that wasn't even the case: they rose.
According to the industry association World Gold Council (WGC), gold producers' AISC rose 16 percent year-on-year to $1,785 per ounce in the first quarter.
“Rising costs have become a permanent feature of the industry,” writes Oliver Blagden, mining analyst at consultancy Metals Focus. The first quarter marks the 28th consecutive year-over-year increase in AISC.
The most significant cost driver is the license and funding fees (royalties). These are the payments to the state or the holder of mining rights that companies have to pay for mining gold. Because the price of gold rose so significantly last year, sales in the first quarter of the year also rose by 85 percent compared to the previous year, according to Blagden.
According to the analyst, royalties make up twelve percent of AISC. So they are not the only reason for the rising costs. Another significant factor is the Iran War. According to asset manager VanEck, fuel and energy make up up to 20 percent of AISC.
The diesel shortage is particularly putting pressure on producers, especially in Australia. Wholesale prices there rose by 96 percent within a quarter, writes Blagden.
Yet despite these higher costs, gold producers operate exceptionally profitably. According to Blagden, their average margins per ounce produced increased by 134 percent in the first quarter compared to the previous year to a record $ 3,076 per ounce.
The WGC has not yet published average AISC for the second quarter. But although the price of gold fell by around 14 percent in the second quarter, the majority of mining companies are likely to have continued to operate very profitably.
The major gold mining companies benefited from high gold prices in the second quarter and some reported billions in profits. Barrick, for example, increased its net profit by 50 percent to $1.22 billion. Industry leaders Newmont and Agnico Eagle also published net profits of well over a billion dollars each and pointed to strong cash flows despite increased costs.
“With current gold prices at around $4,000 per ounce, the sector is currently generating operating margins of approximately $2,000 per ounce, among the highest in the industry’s history,” writes Imaru Casanova, portfolio manager at VanEck, in an analysis.
Even in a stressed scenario where gold prices remain around $4,000 and production costs increase by 10 to 15 percent, the sector would continue to generate significant free cash flow per ounce. This refers to the cash inflow remaining after investments per ounce of gold mined. “Companies don’t need gold prices to continue rising in order to remain highly profitable,” writes Casanova.
In addition, according to the expert, the gold mining companies have sustainably expanded their margins - unlike in previous gold peaks. They would maintain strict cost discipline, drive operational improvements to counter rising costs and also avoid deterioration in ore grades. “In many ways they are in the strongest financial position the sector has seen in years,” she writes.
This is also reflected in the fact that larger companies take over smaller ones. In August, the Canadian gold and copper company Oceana Gold Corporation took over the Australian developer Ausgold for around 776 million Australian dollars (around 550 million US dollars).
However, investors who speculate on profits with stocks of gold miners should be aware of risks. Even broad gold mining indices are subject to strong fluctuations. Prices fell by around a fifth in March and by around 15 percent in June.
This was also connected to the Iran war, which caused the price of gold to collapse. Energy costs rise the longer the Strait of Hormuz remains closed - this drives inflation and thus investors' interest rate expectations. High interest rates are usually bad for gold. The precious metal does not generate any ongoing income.
However, this connection weakens when investors' confidence in other assets that were previously considered safe, such as bonds, erodes. That's exactly what happened after the US Treasury Department announced in recent weeks that it would double its planned purchases of 10-, 20- and 30-year government bonds to at least $4 billion. The price of gold then rose significantly. But he corrected after Kevin Warsh, head of the US Federal Reserve, described the PCE inflation rate as “concerning” in a speech.
