Tuesday, 9 July 2024 Reading time : 2 minutes

Gold is trading at record highs, with a troy ounce hitting over USD 2,400.00 in May. Since then, the price has fallen, but the precious metal is still more expensive than ever (read more). 

A good position for gold miners, one might think: as the price of the commodity rises, producers should benefit. But it's not that simple, because the gold price is only one factor influencing the performance of miners. A look at the cost of production, which has been rising steadily over the past few years, is evidence of this. A good measure are all-in sustaining costs (AISC), which reflect the cost of producing an ounce of gold in US dollars, including energy, labour and exploration. Across the global gold industry, AISC climbed to an average of USD 1,342.00 in the last quarter of 2023, reaching a record high, according to data from the World Gold Council (WGC). 

Costs are rising due to several factors, with inflation affecting the capital-intensive business of mine operators. In 2023, higher fuel and electricity prices in particular were felt throughout the industry, according to a survey by data provider Global Data. Labour costs have also rise, and in some cases, mine workers have gone on strike to press their demands as the US mining company Newmont experienced in Mexico. Workers at the Penasquito gold mine went on strike for four months last year to negotiate higher wages and a profit-sharing bonus. As a result, Newmont had to lower its annual gold production target for 2023.

In addition to economic and company-specific factors, there are also industry-wide cost drivers. “We’ve seen record first quarter mine production in 2024,“ said John Reade, WGC Chief Market Strategist, in an interview with US news channel CNBC. “But the bigger picture, I think, is that it plateaued around 2016, 2018 and we’ve seen no growth since then.” According to Reade, it is getting harder to find gold, permit it, finance it, and operate it. 

In fact, the probability of actually finding promising gold reserves is low: according to the WGC, less than 0.1% of gold reserves discovered are further explored and developed into mines. Once the first hurdles have been overcome, patience is required as it usually takes ten to twenty years from the discovery of a new gold deposit to its development.

Despite the many challenges facing gold miners, WGC experts see a silver lining on the horizon. They expect price growth to slow and, thanks to high gold prices, the pressure on gold producers' profit margins to ease. However, no one can say with certainty in which direction the price of gold will move in the coming weeks and months.

Investment idea
In terms of market capitalisation, Newmont and Barrick Gold belong to the world's largest gold mining companies. The barrier reverse convertible on the two stocks partially cushions price setbacks and pays a guaranteed coupon of 9.00% p.a.

Termsheet (Valor 135803837)

Indicative terms

 

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