By Grady Wulff, Market Analyst, Bell Financial Group
Despite a post US election pull back in the price of the precious commodity, the tailwinds remain in place for gold to continue its rally into the new year. The price of gold has soared over 30% in the last 12-months to a record high over US$2500/ounce. Rising demand, geopolitical tensions, investors utilising the safe-haven nature of gold, and rate cuts are the drivers of the recent rally. But how do you choose the right gold miner to invest in?
Metrics for picking a gold miner:
All-In Sustaining Costs (AISC)
All-in Sustaining Costs (AISC) is a measure defined by the World Gold Council, as the cost of sustaining current mining operations. The costs measure the overall cost of operating and producing the bullion at the gold mine and is measured in US$/ounce. Lately, global inflationary pressures have hit global mining operations, raising the average AISC to US$1342/ounce in the latest quarter data for Q4 FY23, while mine production increased 4% YoY to record levels for Q1 FY24. The lower the AISC the better against the sale price as this is where margins are made.
Gold grade
The grade of gold in a company’s deposit is a key driver of value to the market.
The World Gold Council defines 8 – 10 grams/tonne as ‘high quality’ for underground mining, and 1 – 4 grams/tonne as ‘low quality’.
Open pit gold mine grade quality averages between 1 – 4 grams/tonne, anything above 5 grams/tonne is considered high-grade. Grade is not definitive of a company’s value; lower grade just requires more ore body to be processed.
Life of mine
Gold Mining Operation: 10 – 30 years. During its life, a number of factors – such as the price of gold or input costs – will affect which areas of an ore body are deemed profitable (economic) to mine.
Factors impacting the life of mine include gold price, input costs, total fixed costs, access to ore body, service availability, demand outlook, and more.
Mineral Resource/Ore Reserves
Mineral Resources can be defined as the concentration of material of economic interest in or on the earth’s crust, whereas Ore Reserves are the parts of a Mineral Resource that can at present be economically mined.
Distance to processing plant
The distance to a gold miner’s processing plant determines costs of haulage to turn the ore body into bullion. For example, if a miner has a processing plant close to its underground deposits it reduces haulage and time costs for processing the ore body.
Access to ore body
A gold miner may boast the highest grade and largest gold deposit in the world, but accessing the deposit and extracting the gold may be another story. The difficulty of accessing the deposit determines the value of the miner based on the costs associated with turning the ore to bullion.
The depth of ore and profitability of the ore body compared to mining costs are key drivers of a gold miner’s value.
From a corporate side of a mining operation, you should consider the following:
Funding
If the miner constantly capital raises or has a high debt level, this may reduce the value of the miner.
When considering which miner to invest in you should consider asking yourself, is the gold miner is fully funded or is a capital raise coming?
If the miner is fully funded and has strong corporate backing, the value is deemed higher. You should also analyse the miner’s shareholder register to determine if institutional or big banks are buying into the miner– this may add credibility to the company.
Management team
A key indicator of the value of a gold miner is the experience of the management team behind the operations and the board governing the company.
Has the Managing Director led a team before? What is their background – finance or geology? Have they operated in gold before or is this their first time? These are all questions that determine the value of the board and management team.
Hedged Vs Unhedged – common practice to protect against potential losses if the gold price slumps.
The sale of bullion can be hedged or unhedged through various derivatives instruments.
Many gold miners hedge in times of uncertain gold price outlook.
Selling at the spot price is beneficial when the outlook for gold is strong, like in 2024, while hedging is greater in times of spot price depreciation. Hedging is attractive because gold is almost always in contango, which means the futures and forward prices are often higher than the spot price.
- Fundies are urging gold miners to resist the temptationto lock in multi-year hedging agreements because they think that the gold rally has further to run.
Exploration potential
Once the miner becomes a producer, the gold miner will often shift focus back to exploration beyond the walls of the initial deposit to determine if further ore reserve can be identified on the exterior of the initially defined deposit.
In summary, the above are just some of the ways you can form the foundations of an investment decision for a gold miner. Other more technical ways include performing equity valuation methods.
Tandem Securities is a registered business name of Third Party Platform Pty Ltd, ABN 74 121 227 905, and Australian Financial Services License (AFSL) 314341. Market and Settlement Participant of ASX and Trading Participant of Cboe Australia. Tandem Securities does not provide investment advice. This article is General Advice only. You should consider your own financial situation, needs and investment objectives before acting on any of the information in this article.
