Ninety One Global Gold Strategy, focuses on investing in gold companies and is currently over 98% invested in gold and silver miners.
With twenty-six holdings currently, we concentrate on producing companies and hold only one exploration firm, as margins today are the best we’ve seen in several decades. At the same time, the current moves in raw materials threaten to put pressure on Capex budgets for developing companies, as well as push gold prices higher in the short term, as inflation concerns increase. In this environment, we believe equities can continue to generate strong returns – and a holding in precious metal equities is a complementary addition to a physical gold holding in many portfolios.
Gold equities offer many of the same investment characteristics as gold, including diversification away from other major asset classes. However, the price performance of gold equities is more volatile than that of the commodity itself. For a given percentage change in the gold price, it is typical of gold miners to provide an amplified reaction in both directions. In other words, a relatively small increase in the price of gold can lead to a much larger gain in gold equities.
However, the level of sensitivity to the gold price is not constant. Over time, it will change due to factors such as gold miners’ balance sheets, exploration plans, and management quality. Gold equities provide leverage to the gold price and have, therefore, outperformed what has been a rising gold market. Irrespective of the gold price, the share prices of gold miners are reflecting attractive underlying fundamentals. Through these fundamentals, companies are in the best condition they’ve been in for over 20 years. Gold companies are enjoying very high margins and producing, in most cases, very high levels of free cash flow. Valuations are reasonable and have scope for appreciation as more investors realise the income and diversification benefits they offer in uncertain markets. As such, in addition to offering many of the same investment characteristics as gold, gold equities also bring complementary qualities to a portfolio, which we explore in more detail below.
Dividends per share of the top five gold companies have doubled since 2015 and, at the time of writing, look set to increase again.
Gold equities can provide a yield unlike gold itself
While physical gold offers no income, gold equities increasingly do so – in the form of dividends. Gold stocks generally rise and fall with the price of gold as detailed above. However, the gold mining sector is continually reshaping itself to generate higher returns on capital even in a neutral gold price environment, meaning there are well-managed mining companies that are profitable even when the price of gold is considerably lower than it is today.
Gold miners are increasingly focused on producing value for shareholders rather than growth for the sake of growth. Dividends per share of the top five gold companies have doubled since 2015 and, at the time of writing, look set to increase again. The majors are leading the way with dividend raises, and smaller gold producers will likely follow. Against a backdrop of historically low interest rates, lacklustre returns from fixed income, and enforced dividend cuts in other sectors such as banking, there is increased investor interest in gold mining companies.
Gold equities offer growth optionality
Gold – the physical asset – does not offer growth potential over and above the changes in its value, since an ounce of gold will always be just an ounce of gold. A miner, however, is a business that can expand over time and produce more gold by investing in its mining operations. The most common measure of mining costs is called All-In Sustaining Costs (AISC), which includes the costs required to operate mines, maintain mines and equipment, and invest in mine development. When taking AISC into consideration, miners’ exposure – and leverage – to the gold price is clear.
A larger company will benefit from economies of scale and lower costs, while a smaller company with more leverage can see their shares respond more dramatically to changes in the gold price. At today’s price levels, gold companies are profitable. As balance sheets and sentiment towards the gold space have been repaired over recent years, if costs remain stable, gold equities are likely to display significant gains in response to upward moves in the gold price. It is important to remember, however, that a gold miner’s leverage to the price of gold applies in both directions.
ESG considerations are highlighting the more sustainable companies
Gold mining has long had a reputation for having negative social and environmental impacts; however, we think that for some companies (although not all) this is now changing. As they have for investors, ESG factors are starting to shape the evolution of gold mining companies, with key market participants developing a range of initiatives and standards in order to see that gold is produced sustainably and responsibly. It has become apparent that ESG criteria are increasingly important when endeavouring to assess, effectively, a business’s resilience, its long-term sustainability, and its capacity for growth. ESG factors are now regarded as a source of value creation and, with the help of shareholders and investors such as Ninety One, we are seeing mining companies begin to reshape their portfolios, review supply chains, and lower their carbon footprints.
Gold mining companies not only have diversification and return benefits for investor portfolios but are also now in a strong position to demonstrate improving ESG standards.