WHI Equity Research Corporate Sector Comment - Gold

Gold – Robust pricing, improved returns and increased interest The robust gold price, currently sitting comfortably above $1,700/oz, has been one of the bright spots of the current COVID crisis, although the roots of the price increase were seen well before from mid-2019 on geopolitical and trade concerns. Gold mining companies have been reaping the rewards of the higher price with forecast profits and cash expected to grow significantly. The increase in gold price has been reflected by share price appreciation for most of the gold-mining sector; gold miners, those companies developing gold projects and even gold explorers have all seen an uptick in share prices. Those companies in production should see considerably higher profits and we expect the level of dividends back to shareholders to rise. The rate of M&A in the sector might also increase, as in previous high price periods, with some companies assuming that these prices can be sustained – however, they will have to be careful as a rash of M&A in previous cycles has shown that there may be a price to pay later on and the industry can ill afford a return to eye-wateringly large write-downs on the other side of this cycle. Gold miners will also have to behave prudently as there will, of course, be a temptation for higher throughput and production, regardless of grade, to generate more cash – a decreasing profit margin perhaps, but a lengthening mine life; as in everything there is a balance to be made to ensure sensible returns. We are most heartened by a renewed interest in the previously (seemingly) ignored junior explorers which we think is a theme that will develop and continue.