Nonetheless, gold miners will remain committed to lowering costs and reducing debt to better withstand gold price volatility.
This is the view of BMI Research – a unit of the Fitch Group.
Following years of financial austerity, prioritising cost competitiveness and core assets, gold miners will gradually shift the focus to growth, through acquisitions and increasing spending.
Senior gold miners will prioritise risk mitigation, in terms of both political and financial risk, resulting in project development in developed markets and joint-venture partnerships among top firms.
The improving outlook for gold prices will support mergers, acquisitions (M&A) and investments in the industry as over-leveraged major firms continue to offload as sets in an effort to narrow portfolios.
Chinese firms in particular will drive deals, with the Asia Pacific region more than doubling gold 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 April 20 17, Barrick Gold 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 gold 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 gold sector will continue to be dominated by Polyus Gold, as the firm’s Natalka mine remains the key driver of gold production growth over our forecast period to 2021.
Large-scale, low-cost producers such as Zijin Mining and China Gold International Resources will support China’s slowing gold 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 priority
Miners will remain focused on lower operating costs to improve competitiveness and better withstand long-term price volatility. Top miner Barrick Gold remains an industry leader in cost competitiveness, posting all-in sustaining costs (AISC) of $772/oz in Q1, 2017 compared to an average of $850/oz among senior gold 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, South Africa’s gold sector will face elevated operating costs due to ongoing labour unrest and power shortages. For instance, in Q1, 2017, Gold Fields‘ AISC averaged among the highest of senior gold peers, at $1 009/oz.
Slow return to spending
While improving gold prices will boost miners’ profit margins over the coming quarters, BMI Research expect firms to remain committed to s pending cuts in an effort to reduce debt loads.
For example, despite reducing net debt by 35% over 2013-2016, Barrick Gold’s total debt level remains elevated at $7.9 billion as of January 2017.
Furthermore, capital expenditure estimates for 2017 indicate that although gold companies may have turned a financial corner in 2016, spending will not return to the heights of the past decade. For instance, Randgold Resources, which stands alone among peers in not sustaining any debt, will use free cash flow growth of 29% year-on-year in 2016 to maintain a policy of dividend increases, rather than invest in exploration.
This was demonstrated by the 52% hike in pay-outs to shareholders put in place in early February 2017.