SPROTT’S THOUGHTS | Gold Miners Share Price Performance: Australia vs. North America

Gold Miners Share Price Performance: Australia vs. North America

By Steve Todoruk

After the rapid rise to $1,250 from the low of $1,050 per ounce in late 2015, gold traded in a range between $1,200 to $1,300 for most of 2016 and 2017. Three to four years of house cleaning, cost cutting and efficient operation put the gold miners in position to make good profits during the latter two years, especially given the $200 increase in the gold price.

The first quarter of 2018 saw gold rise nicely over the $1,300 level. This translates to more profit on every ounce of gold produced. So far, gold has held this level impressively and, should it continue, the trend bodes well for the entire sector – including disappointed and frustrated investors.

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Gold Bullion (XAU) Q2 2013-Q1 2018, Source: Thompson Reuters, March 21, 2018.

Historically, when gold rises steadily, or makes a significant jump upwards (implying to some that the miners will increase profits), the share prices of those companies rise in tandem. For the most part, we have not seen this with North American miners. However, a number of Australian gold miners have benefited.

All other things being equal, you would expect the share prices of all gold miners to behave similarly. What gives?

COMMODITY CURRENCY PLAY

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Australian Dollar (AUD/USD) Q2 2013-Q1 2018, Source: Thompson Reuters,   March 21, 2018.

In late 2014, the Australian and Canadian dollars fell sharply against the U.S. dollar. Over the course of 2015 the AUD and CAD both fell from near par against the USD down to 0.70. Since then, both currencies have rebounded to around 0.78.

Australian and Canadian mine operators incur most of their costs in their local currency while their product, gold, is sold in U.S. dollars. As a result, the weaker currencies translate to an extra 25% in profit.

With this windfall, many of the Australian companies elected to pay down debt and accumulated strong cash reserves – both of which were cheered by investors.

THE AUSSIE ADVANTAGE

There are far more gold mines in Australia than in Canada. Furthermore, most of the Australian mines are open pits and usually employ less costly heap leaching processes. The resulting mines are often more profitable.

Furthermore, Australia is more arid than Canada. Hence, gold deposits that outcropped on the surface long ago encountered weathering, which would result in oxidized gold mineralization. This often results in less expensive mining and processing.

Building a new open pit mining operation on a close-to-surface gold deposit is not prohibitively expensive and payback occurs quickly. Therefore, companies can build a range of small to large open pit mines which are profitable at today’s gold prices.

On the other hand, the colder Canadian climate means gold deposits that outcrop at the surface are mostly unweathered and unoxidized (unless they were in unglaciated areas) and therefore require higher grades to justify mining.  Higher mining costs mean lower profits.

CHARTING THE GOLD MINERS

Looking at the selected stock charts (source: Thompson Reuters, March 21, 2018) of some high-profile gold miners, we see that Newmont, Barrick Gold, Agnico Eagle Gold Mines and Randgold all traded in a range during 2016 and 2017, the time gold traded between $1,200 and $1,300.

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Newmont Mining Corporation (NYSE:NEM) Q2 2013-Q1 2018, Source: Thompson Reuters, March 21, 2018.

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Barrick Gold Corporation (TSX:ABX) Q2 2013-Q1 2018,     Source: Thompson Reuters, March 21, 2018.

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Agnico Eagle Gold Mines (NYSE:AEM) Q2 2013-Q1 2018, Source: Thompson Reuters, March 21, 2018.

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Randgold Resources (NASDAQ:GOLD) Q2 2013-Q1 2018, Source: Thompson Reuters, March 21, 2018.

Meanwhile, Australia’s Evolution Mining and Northern Star Resources rose approximately 250% to 300%.

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Evolution Mining (ASX:EVN) Q2 2013-Q1 2018, Source: Thompson Reuters, March 21, 2018.

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Northern Star Resources (ASX:NST) Q2 2013-Q1 2018, Source: Thompson Reuters, March 21, 2018.

It is also noteworthy that when the Australian dollar dropped dramatically in 2014, the share prices of Australian gold miners such as Evolution and Northern Star rose significantly. This came despite a gold mining bear market with two years left to go and before gold began its rise (relative to the U.S. dollar).

CANADA VS AUSTRALIA: WHY NOT BOTH?

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Kirkland Lake Gold (TO:KL) Q2 2013-Q1 2018, Source: Thompson Reuters, March 21, 2018.

Interestingly, one example of a gold miner that has significant gold mining exposure in both Australia and Canada is Kirkland Lake Gold. Kirkland was a Canadian-only gold miner (with underground mines) up until a few years ago when it acquired the Australian gold mines of another miner.

With a significant Australian presence and the ability to reap the benefits of a weak Australian dollar, Kirkland has seen its share price rise nearly 700% – making it the best performing big gold miner in terms of share price.

If the trend of slowly rising U.S. gold prices and a weak Australian dollar continues, I expect the above trend to continue as well.

Questions or comments? Contact the author here.

Steve Todoruk

Steve moved to California from Vancouver, British Columbia in 2003 to join Global. He graduated in 1985 from the University of British Columbia, located in Vancouver, with a Bachelor of Science degree majoring in Geology and currently is a Professional Geoscientist in good standing in British Columbia.

Following his graduation, Steve worked for several major and junior mining exploration companies as a field geologist in Canada and the southwestern United States. During that time, he also worked in an underground mine in Canada for two years operating equipment to learn that aspect of the mining industry. Between 1993 to early 2003 Steve was the president of two Canadian-based junior mining exploration companies and a principal in a mineral exploration consulting and engineering firm.

 

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