Gold miners operating in Africa will face headwinds from increasingly populist policy positions that raise costs, compounded by power shortages and labour unrest.Major global gold miners will see rising profits as gold prices continue to climb over the coming years, encouraging a slow return to growth strategies.
This is the view of BMI Research - a unit of the Fitch Group.
Gold miners operating in Sub-Saharan Africa, meanwhile, will face headwinds from increasingly populist policy positions that raise costs.
Following years of financial austerity, prioritising cost competitiveness and core assets, miners will gradually shift the focus to growth, through acquisitions and increasing spending.
Senior miners will prioritise risk mitigation, in terms of both political and financial risk, resulting in project
development in developed markets and joint-venture partners hips among top firms.
As lower recovery in prices, compared to the spike in base metal prices, will result in a gradual recovery for miners.
For instance, in Q3, 2017, profit margins among top miners averaged 0.8% compared to an average of 8 .2% for top diversified miners.
Outbound Chinese investment to drive deals
Chinese firms in particular will continue to target assets abroad, with the Asia Pacific region more than doubling mining M&A activity to US$7.2 billion in 2016.
Key deals included state-owned China National Gold Group's $300 million purchase of the Jinfeng gold mine from Eldorado Gold and Indonesian firm PT Amman Mineral International's $1.3 billion purchase of Newmont Mining's Indonesian assets, including the country's second largest copper-gold mine, Batu Hijau.
More recently, in May 2017, Chinese conglomerate Fosun International invested $890 million for an initial 10% stake in Russian miner Polyus.
In April 2017, Barrick announced the sale of a 50% s take in the Veladero mine in Argentina to Chinese firm Shandong Gold for $960 million.
The two companies will also work together on the former's Pascua-Lama project and other exploration.
Industry to remain fragmented
In terms of market share, the global industry will remain fragmented, with a number of active junior miners and exploration firms.
Barrick Gold, Newmont Mining, AngloGold Ashanti and Goldcorp will remain the largest producers, accounting for nearly one-fifth of global output. Russia's sector will continue to be dominated by Polyus, as the firm's Natalka mine remains the key driver of production growth over coming years.
Large-scale, low-cost producers such as Zijin Mining and China Gold International Resources will support China's slowing production growth, while firms such as Shandong Gold Group and Shaanxi Gold Group invest in projects abroad along China's planned Silk Road infrastructure initiative.
Cost cutting to remain a priority
Miners will remain focused on lower operating costs to improve competitiveness and better withstand long-term price volatility.
Top miner Barrick remains an industry leader in cost competitiveness, posting all-in sustaining costs of $710/oz in Q2, 2017 compared to an average of $884/oz among senior miners.
The firm's low operating costs will continue to be supported by high-grade reserves and a focus on digital technologies and innovation through partnership with IT firm Cisco Systems.
Meanwhile, miners operating in Sub-Saharan Africa will face elevated costs due to regulatory uncertainty, power shortages and labour unrest.
For instance, in September, Acacia Mining announced plans to reduce operations at the Bulyanhulu mine in Tanzania, following unsuccessful negotiations over the government's decision in March to ban gold and copper ore exports.
The export ban will continue to weigh on parent company Barrick, lowering cash flow and resulting in lower y-o-y gold production in Q3, 2017.
In South Africa, in H1, 2017, Gold Fields' AISC averaged among the highest of senior peers, at $975/oz.
Slow return to spending
While improving prices will gradually boost miners ' profit margins over the coming quarters, we expect firms to remain committed to spending cuts in an effort to reduce debt loads.
For example, despite reducing net debt by 35% over 2013-2016, Barrick's total debt level remains elevated at $6.4 billion as of September 2017.
Furthermore, capital expenditure estimates for 2017 and 2018 indicate that although companies may have turned a financial corner in 2016, spending will not return to the heights of the past decade.
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