Gold mining stocks have surged 126% this year, outpacing AI giants and Bitcoin. While the sector’s “undisciplined past” keeps investors cautious, companies must now decide how to utilize their massive profits.
Gold mining stocks have achieved the strongest rally in the investment world this year, leaving both artificial intelligence companies and Bitcoin behind. The bull market in the precious metal has led to an explosion in the share prices of long-overlooked mining companies.
The S&P Global Gold Mining Index has risen 126% since the start of the year, marking the best performance among all S&P sector indices.
‘They Have Too Much Cash to Know How to Spend’
Among the year’s winners are Agnico Eagle, Barrick Mining, and Newmont. These companies have profited enormously from the 52% increase in gold prices since January.
Imaru Casanova, a portfolio manager at investment firm VanEck, said, “It has been a very good year for gold stocks. They have too much cash to know how to spend.”
However, this performance is tempered by cautious optimism among investors. The sector has yet to shake off the memories of the “gold rush” that followed the global financial crisis.
The 2011 Crash
During that period, rising gold prices led companies to engage in aggressive acquisitions, executive pay increases, and soaring production costs. But after peaking in 2011, gold lost 79% of its value within four years.
“There was a huge amount of value destruction at that time. Those mistakes are still fresh in investors’ minds,” Casanova commented. “No one is sure if the same mistakes will be repeated now.”
Gold Surpassed $4,000
This week, gold surpassed $4,000 per ounce. The risk of a US government shutdown, ongoing central bank purchases, and concerns about rising public debt have pushed prices to record highs.
Mining companies directly benefit from the rise in gold prices due to their fixed production costs.
They Left Tech Giants Behind
Shares of gold mining companies like Agnico Eagle are up 113% year-to-date, Barrick is up 114%, and Newmont is up 134%. China’s Zijin Gold also doubled its value after its public offering at the end of September.
In comparison, Nvidia rose 40%, Oracle 72%, Alphabet 30%, and Microsoft 25%, while Bitcoin increased by only 31%.
‘They Can Regain Trust’
Gold fund managers are cautioning companies against returning to past excesses. Keith Watson, manager of the Golden Prospect investment fund, stated, “They are behaving well for now. But this is a ‘show me’ story; people will only believe it when they see the results.”
George Cheveley, a portfolio manager at asset manager Ninety One, described the sector as “inherently cyclical, making money in short bursts,” and said:
“Because they earn very fast, they sometimes go to extremes. It will be insanely profitable initially, but not everyone will be able to maintain discipline.”
As returns increase, so does pressure on management. Newmont and Barrick announced new CEO appointments last week. Matthew Murphy, an analyst at BMO Capital Markets, suggested that Barrick’s surprise CEO change “may be related to their stock performance lagging behind their peers.”
Expecting $60 Billion in Cash
Analysts predict the sector will generate $60 billion in free cash flow next year.
Evy Hambro, Head of Thematic and Sector Investing at BlackRock, noted that companies “have finally achieved strong profit margins,” adding, “Returning capital to shareholders who have been patient for a long time should be the priority.”
Hambro advocated for dividend payments over share buybacks, stating, “Shareholders should also have the option to receive payments not just in dollars, but in the form of gold-backed ETFs.”
Potential New Acquisitions
On the other hand, the sector’s appetite for mergers and acquisitions may resurface. The scarcity of new gold reserves could force companies to consolidate to close production gaps. Experts suggest that “all-share deals,” similar to the recent merger between Anglo American and Teck Resources, could become prominent during this period.
Another debate in the sector is the salaries of top executives. Marcelo Kim, partner at Paulson & Co. and Chairman of Perpetua Resources, harshly criticized gold miners for “excessive pay” in 2017. While Kim acknowledges there is more financial discipline today, he warned, “No one should be getting crazy bonuses just because the price of gold has gone up.”
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