For decades, gold miners have behaved as ‘jacks of one trade’ in terms of their business strategy. Their past focus on the yellow metal alone has proven a pill that’s been hard to swallow.
When gold prices have declined, company share prices have also plummeted. On the other hand, rising gold prices and the subsequent huge amount of cash available have sometimes led to a rushed approach to mergers and acquisitions (M&A). However, there are indications that this trend has been changing over the last few years.
The decarbonisation of the global economy will play a critical role for mining companies, and most major gold miners view copper and battery metals as an integral part of their business strategies. In fact, the CEOs of the world’s two largest gold-producing companies – Tom Palmer and Mark Bristow, from Newmont and Barrick respectively – have been cited discussing their plans to increase their companies’ exposure to the red metal. This approach is likely to help these firms fare better in ever-changing market conditions.
Due to its safe-haven status, gold tends to outperform in times of geopolitical and/or economic distress and can be viewed as an indicator of market fear. Copper, in contrast, usually performs well when the economy is growing, making it a robust indicator of the global economy’s health. Having exposure to both metals seems to be a good hedge against the cyclical nature of commodities. The copper revenues reported last year for some of the largest gold companies climbed to reach nearly one-quarter of their total revenues.
COPPER, IN CONTRAST, USUALLY PERFORMS WELL WHEN THE ECONOMY IS GROWING, MAKING IT A ROBUST INDICATOR OF THE GLOBAL ECONOMY’S HEALTH.
The red and yellow metals are usually found and extracted together in certain copper porphyry deposits, such as Grasberg in Indonesia, Oyu Tolgoi in Mongolia and Cadia in Australia. Since 2010, copper production from the 20 largest gold-mining companies has increased by 7.7%, to 2.4 million tonnes last year or around 11.7% of total global production. Over the same period, gold production has increased by 5.8%, to just over 37 million Troy ounces last year, representing around 35% of total gold output.
Taking into consideration the mineral reserves of the top 20 companies, we can note a decline in main metal gold, as newly discovered ounces through exploration or M&A have not been able to replenish reserve depletion. As a result, gold reserves have dropped by nearly 15% since 2010, to 586 million Troy ounces. On the other hand, copper, zinc and silver reserves have increased by 5.4%, 5.0% and 11.7% respectively.
Exploration budgets surge…but have still seen better days
Companies have reported a surge in exploration expenditure in the last three years, surpassing $2.2 billion US dollars. This usually happens after a spike in gold’s value, but even so, it remains considerably lower than that during the previous gold price rally between 2010 and 2013. The extra cash available also fuels M&A deals, as seen already in the first three months of the year. The biggest news has been Newmont’s $US19.5 billion offer to acquire Newcrest Mining, which, if successful, will create a behemoth gold producer, with annual output nearly double that of Barrick.