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Global Resource Insights: Gold Miners Share Price Performance – Australia vs. North America

By Steve Todoruk

After the rapid rise to $1,250 from the low of $1,050 per ounce in late 2015, gold traded in a range between $1,200 to $1,300 for most of 2016 and 2017. Three to four years of house cleaning, cost cutting and efficient operation put the gold miners in position to make good profits during the latter two years, especially given the $200 increase in the gold price.

The first quarter of 2018 saw gold rise nicely over the $1,300 level. This translates to more profit on every ounce of gold produced. So far, gold has held this level impressively and, should it continue, the trend bodes well for the entire sector – including disappointed and frustrated investors.

Gold Bullion (XAU) Q2 2013-Q1 2018, Source: Thompson Reuters, March 21, 2018.

Historically, when gold rises steadily, or makes a significant jump upwards (implying to some that the miners will increase profits), the share prices of those companies rise in tandem. For the most part, we have not seen this with North American miners. However, a number of Australian gold miners have benefited.

All other things being equal, you would expect the share prices of all gold miners to behave similarly. What gives?

COMMODITY CURRENCY PLAY

In late 2014, the Australian and Canadian dollars fell sharply against the U.S. dollar. Over the course of 2015 the AUD and CAD both fell from near par against the USD down to 0.70. Since then, both currencies have rebounded to around 0.78.

Australian Dollar (AUD/USD) Q2 2013-Q1 2018, Source: Thompson Reuters,   March 21, 2018.

Australian and Canadian mine operators incur most of their costs in their local currency while their product, gold, is sold in U.S. dollars. As a result, the weaker currencies translate to an extra 25% in profit.

With this windfall, many of the Australian companies elected to pay down debt and accumulated strong cash reserves – both of which were cheered by investors.

THE AUSSIE ADVANTAGE

There are far more gold mines in Australia than in Canada. Furthermore, most of the Australian mines are open pits and usually employ less costly heap leaching processes. The resulting mines are often more profitable.

Furthermore, Australia is more arid than Canada. Hence, gold deposits that outcropped on the surface long ago encountered weathering, which would result in oxidized gold mineralization. This often results in less expensive mining and processing.

Building a new open pit mining operation on a close-to-surface gold deposit is not prohibitively expensive and payback occurs quickly. Therefore, companies can build a range of small to large open pit mines which are profitable at today’s gold prices.

On the other hand, the colder Canadian climate means gold deposits that outcrop at the surface are mostly unweathered and unoxidized (unless they were in unglaciated areas) and therefore require higher grades to justify mining.  Higher mining costs mean lower profits.

CHARTING THE GOLD MINERS

Looking at the selected stock charts (source: Thompson Reuters, March 21, 2018) of some high-profile gold miners, we see that Newmont, Barrick Gold, Agnico Eagle Gold Mines and Randgold all traded in a range during 2016 and 2017, the time gold traded between $1,200 and $1,300.

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MARKET SUMMARY

INDICES

Name Last Change
DOW 24462.90 0.80%
S&P 500 2670.14 0.84%
NASDAQ 7146.13 1.29%
TSX 15484.32 0.19%
TSX-V 804.96 0.00%

Resource Commodities

Name Last Change
Gold 1325.20 0.78%
Silver 16.76 2.21%
Copper 3.13
Platinum 922.00 0.29%
Oil 68.38 0.13%
Natural Gas 2.74 2.88%
Uranium 24.25 N/A
Zinc 1.47 0.00%

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