Financial Analysis of Gold Market – February 2017

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Gold has been on a bull run since it bottomed at 1,125 last December, one day after the Fed Meeting. Gold made its first run from 1,125 to 1,220, up 95 dollars, then pulled back and made its local bottom at 1,180. The run resumed then and topped at 1,247 on Feb 8th. It closed at 1247.60 on March 1, 2017.


Bubble size represents market cap


Description: Figure 1 highlights the performance of the gold mining industry for the month of February 2017 (x-axis) and the performance of the 11 months prior to February 2017.

After five years of painful belt-tightening, the world’s biggest gold miners are starting to cautiously loosen their purse strings and spend more money to find new deposits and build mines. Many top miners said they have made it through the worst of a draining effort to slash costs and bloated debt loads. The austerity measures came as the industry’s high-priced acquisition spree was followed by a slide in bullion prices in the four years through 2015.

Several miners said this week that they have hiked budgets for exploration, construction and expansion projects. For the first time in at least four years, Barrick Gold Corp lifted its exploration budget, saying it will spend $185-$225 million this year, a sizeable jump from $132 million in 2016. Gold miners have excess cash to spend and most likely not all of it is going to pay off interest and pay down debt. We’ll see excess cash flow toward growing and sustaining their businesses.

Meanwhile, top executives are on the hunt for mergers and acquisitions. The industry has been quiet for the past three years, but now gold miners can’t stop using the word: growth. The trouble is the industry has a bad history when it comes to dealmaking. In the China-led commodity boom, the entire mining industry spent heavily on deals and big projects that soured when metals prices later collapsed. Companies wrote off close to $100 billion between 2011 and 2016.

This signals a dramatic shift in strategy from recent years, when the biggest priority was to survive the downturn in metals prices by cutting costs and paying down debt. As a result, less money went into exploration and existing operations. Due to fewer and smaller discoveries, reduced mine life and a lower gold price since 2013, the amount of economically viable gold in the world is declining.

Nevertheless, AngloGold Ashanti, the world’s third-largest producer, said there’s still room for the company to grow organically. It’s investing in brownfields projects, or areas near existing mines, in Tanzania, Brazil, Guinea and the Democratic Republic of Congo, rather than buying up other companies, according to CEO Srinivasan Venkatakrishnan.

One thing is for sure, as the industry grows hungry for assets, as any new assets come up for sale, there will be a feeding frenzy and the prices on these assets are going to be formidable.