Gold is currently in a privileged moment. Although prices have remained somewhat more stable in recent days, the quintessential safe haven asset is experiencing a booming 2024, reaching $2,372 per ounce after rising by 15.62%. A radical change in market perception about interest rates, a growing geopolitical risk in the Middle East in focus, and central banks buying at accelerated rates have been key to explaining this surge. However, the current paradigm has generated a strange situation for many: while the price of the commodity continues to break records, mining companies that benefit from its extraction are falling.
Although the situation is not the same for all companies, the reality is that specialized gold companies are struggling, mostly facing declines. The S&P Global Mining Gold Index, which tracks the largest firms in the sector, has accumulated a 2% decline in the stock market. The world’s largest gold extraction firm, Newmont Goldcorp, has seen a decline of 4.63% in 2024, similar to Barrick Gold’s 4.36%. Agnico Eagle, more diversified (with presences in Finland, Australia, Mexico, the US, Canada) has surged by 18%, while Wheaton Precious Metals has risen by 8.71%.
The State Street strategist, George Milling Stanley, explains that the reasons driving gold are precisely what prevent its major extractors from gaining ground in the stock market. “Those of us who invest in buying gold bars or securities do so precisely because we want protection against market weakness,” the expert points out. He further states that “when the market falls (which reinforces gold), mining companies tend to fall with it because, despite being related to the commodity, they do not offer that level of protection.”
However, this scenario is not clear to industry agents because a higher commodity price directly implies increased demand and profitability. Therefore, several analysts do not understand why they remain in negative territory and do not rise at a similar pace. “I had never seen the market logic dislocate in this way,” explains Peter GrossKopf, president of SCP Resources Finance LP, in a note to clients.
One of the factors that may explain this ‘dislocation’ is the higher costs that the industry has had to assume in recent months, offsetting record oil prices. Oliver Groß, a commodities analyst and consultant at Rohstoffaktien, explains that these companies are facing “massive cost increases in energy, mining machinery, miners’ wages, activity-related costs… factors that have increased much more than gold prices in recent years.”
“We continue to notice a great inflationary pressure on things like cement, lime, explosives, steel…”
This has caused a significant drop in profits for these companies, for example, Newmont Goldcorp saw its profits decrease from a solid $2.37 billion in 2021 to below $1.36 billion. Barrick Gold has experienced a similar situation, with net adjusted profit dropping from over $1.47 billion to more than $2 billion two years ago. In both cases, Bloomberg’s consensus expects a strong recovery in 2024 following better prices, rising to $2.5 billion for the former and $1.75 billion for the latter. However, uncertainty is high, and everything depends on their ability to reduce costs while operating in a high-interest rate environment that also weighs on their accounts.
Interest Rates
The high cost of money is not shaking gold because, although it boosts alternatives like bonds as safe assets, geopolitical risks are providing special support to the precious metal. Central banks are buying this product rapidly to protect their reserves in this environment, particularly in the Middle East, where tensions between Israel and Iran continue with ongoing attacks, the latest by Israel against Iran.
However, mining firms of all types of metals do not fare well in a higher interest rate environment. They benefit from lower financing costs to obtain liquidity more cheaply to fund new projects from scratch. Therefore, the prospect of interest rates much lower than expected, which precisely is boosting gold, is a double-edged sword for them.
This change in paradigm is a burden for both their accounts and investors, who also have higher-yielding safe assets (like bonds) to turn to beyond the stock market. At the end of 2023, there were talks of up to six rate cuts by the Fed, in a huge and ambitious cut move that would start as early as this month of March. However, not only has this scenario not materialized, but stubborn inflation and a resilient economy have completely blocked this move, and the swaps market now only expects two rate cuts, starting in July or September. A complete paradigm shift that has shaken expectations about mining companies.
Good Outlook
In any case, the coming months are expected to see an improvement in the situation of these companies, with a higher price for their flagship product while significantly improving their cost structure. In fact, Addam Webb, an analyst at the World Gold Council, explains that the cost peak was reached in 2023 and from now on the situation should gradually improve. “After 2022, disruptions in global supply chains and the subsequent war in Ukraine (with distortions in the energy market) shook the prices of key industry products, such as fuels, explosives, and cyanide.”
Now companies are preparing to enter a new era, as the certainty of higher prices is not guaranteed, and despite positive outlooks as they believe inflation may gradually be overcome, the reality is that their path is not without risks. In any case, it is clear that these companies face a complex balance in the market as they are not a safe haven asset but rely on one.
