Gold's Record High: Why Haven't Gold Miners Followed Suit?

Gold’s recent surge to an all-time high of over $2,146 per ounce on Dec. 4 presents a striking contrast to the underwhelming performance of gold mining stocks.

Despite the lustrous appeal of gold’s price, the mining sector, as tracked by the VanEck Gold Miners ETF GDX, surprisingly, languishes more than 50% below its 2011 zenith.

This discrepancy has has triggered confusion among investors and market watchers, leading to an investigation into the underlying causes.

Chart: Gold At Record Highs, Why Aren’t Gold Miners Showing A Similar Strength?

Gold Miners’ Rising Costs Of Productions And Other Causes

Oliver Groß, a seasoned investor and consultant, pinpoints a significant rise in mining costs as a pivotal factor leading gold miners to underperform relative to the gold price.

In a thread shared on social media platform X, Groß showed that in the last decade and a half, expenses encompassing energy resources like diesel (crucial for open-pit mines), lubricants, mining machinery, labor, economic feasibility studies, permitting, and exploration have surged remarkably. This escalation has inevitably squeezed profit margins for gold producers.

Cost Inflation

We have seen a massive increase in the cost of mining over the last 15 years. Whether it is energy raw materials (e.g. diesel is important for open pit mines), lubricants, mining machinery, wages for miners and skilled workers, economic feasibility studies,… pic.twitter.com/lpngaiDx9E

— Oliver Groß (@minenergybiz) December 4, 2023

Groß also highlights a concerning trend of stock dilution among mid- to large-cap gold producers, showing that the number of outstanding stocks has substantially risen over the past decade, as gold miners have, over time, engaged in costly and ill-timed acquisitions.

Barrick Gold Corp. GOLD’s $7.1 billion purchase of Equinox Minerals, Kinross Gold Corp. KGC’s equal sum acquisition of Red Back Mining and Newmont Corp. NEM’s $2.3 billion deal for Fronteer Gold all are prime examples of this trend.

Another angle to this complex scenario is the increasing local opposition to gold mining ventures. Miners, communities, and politicians are voicing stronger demands, fueling strikes and protests. These dynamics add layers of uncertainty and financial strain on mining operations.

The industry's structure adds to its woes. Unlike other commodity sectors where top players dominate significant market shares, the gold mining industry remains notably fragmented. The top 10 gold producers control less than 35% of global gold mine production, a stark contrast to other sectors.

Gold Miners Present A Rare Value Opportunity

Ima Casanova, portfolio manager at VanEck, recently participated in a virtual event hosted by Benzinga, where she discussed the current state of gold stocks in relation to the price of gold itself.

She expressed her belief that even though gold stocks have been trailing behind the performance of gold, there is potential for a sector re-evaluation that could reverse this trend and provide support to gold companies.

While Casanova acknowledged the validity of concerns, particularly those related to operating costs, she views gold companies as significantly undervalued.

Casanova holds the belief that gold stocks should outperform the price of gold when the value of gold is on the rise.

She further elaborated on the concept, explaining that when the price of gold is increasing, these companies experience a much more substantial increase in operating cash flow.

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