Did no-one tell Goldman Sachs equities analysts Andrew Quail and Jitendra Pandey that the same company’s Jeffrey Currie is still saying that gold is a ‘slam-dunk’ sell and that the gold price will collapse by year end, and may go even lower on the way. If so one assumes they don’t believe this ultra-downbeat forecast, which so far this year has been pretty wide of the mark. But then it’s early days yet.
Or is Goldman Sachs just hedging its bets and looking for a fall in the gold price and perhaps also a stabilisation – or even a rise – in at least some gold equity prices even though the metal price could yet collapse – seemingly a contradiction in analytical terms.
In short Quail and Pandey view the moves being taken by the gold producers to reduce capital expenditures and cut unit operating costs as being at least somewhat positive for gold equities. Consequently they have upgraded Goldman’s view on the precious metals mining sector from ‘sell’ to ‘neutral’, and commend gold mining companies for “more responsible use of shareholder wealth.”
There has been a propensity for mining companies of all types – and of gold producers in particular – to pursue growth for growth’s sake without any real look at the overall effect on the bottom line and shareholder returns. Consequently, in some cases, major producers were having to fund the maintenance of dividend payments through borrowing, or asset sales. This was fine, as far as they and their shareholders were concerned, when the gold price seemed to be rising inexorably and such profligate financial behaviour was lost in the euphoria of the investment public who were led to believe that gold was on its way to $2,500, $5,000 or above. This was all brought rapidly down to earth by the sharp gold price falls experienced over the past two and a half years leading to a complete tactical spending turnaround by the major miners.
CEOs were summarily replaced, forced on the miners by those same institutional investors who had previously been pushing them to go for growth at all costs. No-one ever said that financial markets were fair and the unfortunate CEOs caught in the fallout can attest to that! Scapegoats had to be set up and those CEO’s seen as responsible for the abject performances had to be replaced despite the fact that they would have been just as capable of applying the new mantra of capital and unit cost cutting as their successors – perhaps even more so in some cases.
So, it’s been all change in mining company spending policy. Most now worship at the altar of All In Sustaining Costs (AISC) which effectively treats ongoing capital expenditure as a direct cost rather than as a book entry – a crusade which was strongly promoted by then Mineweb analytical reporter Barry Sergeant – a crusade which indeed was not seen as positive by the gold mining sector CEOs in particular, but nowadays virtually all of them have come round to reporting on an AISC basis.
So coming back to the Goldman equities analysts’ views: They say that, after underperforming the general stock market substantially, gold and silver equities now would appear more fairly valued and offer the prospect of a decent upside potential. Indeed the main precious metals stock indices – the HUI, XAU and GDX among others – have virtually all seen good overall growth so far this year (better than that of the S&P 500 for example), although have come off a little in the recent gold and silver price decline.
In part this has been due to the fluctuations in the gold price which, even at its current level, is better than at its December low points, but perhaps mostly to the miners’ belated attention to shareholder interests. The policies being followed may be to the longer term detriment of production growth and reserve figures, but will be beneficial at least in the short to medium term. Beyond this the companies hope that metal price growth may enable them to reinstitute deferred expansion plans and return to mining lower grades thus increasing existing mine lives. But this all now a trade-off between long term output and growth and a move to generate best returns for shareholders.
Consequently the Goldman analysts are putting some of the gold majors back on their buy lists – like Barrick Gold and B2Gold to join Goldcorp, Yamana and Silver Wheaton which were already there. A number of others have been initiated at the neutral level.
Now while we see the Goldman equity analysts’ rerating of the gold equities sector as positive, should their potential nemesis, the same firm’s Jeffrey Currie, be correct in his predictions, their analyses would likely not hold up in the light of likely gold price related market fluctuations. We have felt that Currie’s predictions are extreme – but with Goldman probably being able to drive the gold bullion market on its own, or in concert with its fellow travellers, his views, as we have stated before, could be self-fulfilling. But do the equities analysts know something we don’t or are they working entirely at arm’s length from the commodities team? Whichever way the gold price moves from now, some Goldman followers will make the right investment decisions!
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