ETF Securities’ Gambarini: Gold miners – de-rating done or more to come?


Gold miners’ shares have fallen over 50 per cent since the beginning of 2013, back to the level reached in the aftermath of Lehman Brothers’ collapse in 2008.

For many years, rising margins, coupled with stable demand, allowed gold miners to trade at a substantial premium to many other equity sectors – including the broader mining sector. However, significant underperformance in recent years has meant that the gold mining sectors’ significant premium has evaporated and their valuations have now fallen substantially below that of most other equity sectors including the mining sector.

Gold miners will be reporting earnings over the next four weeks. While some write-downs are likely, downside appears limited given recent sharp share price moves down, opening up opportunities for investors to begin to accumulate positions.

While the bottom of the de-rating might not have been reached yet, we believe that most of the write-offs have already been reflected in market valuations. Gold miners are now trading below estimated book value, setting a medium-term base for share prices. Embracing high-margin low-cost strategies like reducing capex and exploration costs and focussing on a more disciplined capital allocation might be one of the simplest and fastest ways for gold miners to add value.

Consolidation at industry level could also be an effective way to create economies of scale and improve efficiency, thereby improving the bottom-line and supporting share prices. Current depressed gold prices also constitute a threat for gold miners as at current price levels, around 50 per cent of global gold production is considered unprofitable. Although it might take some time for production to adjust to lower prices, some miners are already cutting labour capital and exploration costs that will in turn lead to production cuts.

In the long run we believe that the current situation is not sustainable and the gold price will have to increase to compensate for rising extraction costs, declining ore grades, and reserve replacement. Despite this, the sharp drop in gold miners’ prices to below book-value and the substantial discount to other mining companies, we believe that in the coming months there will be opportunities for investors to begin to accumulate positions.

With growth in the US and China now starting to pick up again and with many equity benchmarks hitting multi-year highs, there may be scope for miners to begin to claw back some of their performance gap to gold.

Simona Gambarini is associate research director at ETF Securities