Big gold has its proponents too

Current net cash flow is not the only factor to take into account when considering investing in the gold majors -long-term stability, income and wealth protection can counter short term financials as a reason to stay with them.

SYDNEY - 

My colleague, Barry Sergeant has recent ly written a well-reasoned analysis on this site suggesting that the days of the big gold mining company may be drawing to a close and suggesting that modern-day shareholder pressures may force the companies, which are pursuing very expensive growth and reserve preservation programmes, to start monetising their assets and generate shareholder revenues this way, rather than expend large capital sums on ever more expensive major gold projects. 

On the face of things he has a point - the big gold companies have perhaps lagged their ferrous and base metals counterparts in building shareholder value and have also commanded investor premiums that do not necessarily justify their positions in the markets.  Yet to an important extent this ignores the continuing lure of the yellow metal for investors and realistically such premiums are likely to continue.

Furthermore, in many people's minds, gold - and by association the big gold miners - is/are considered by many to be a safer short and long term investment than their industrial counterparts which are more subject to the vagaries of global growth patterns - as witness the collapse of metals prices and metals stock prices in the October 2008 meltdown.  True gold and major gold stocks suffered too - but to nowhere near the extent of their industrial metals mining counterparts.  Indeed gold remains one of the few commodities which is still trading at higher levels in dollar terms than it was pre-metals price meltdown.

The problem facing big gold is that it is becoming increasingly difficult to maintain resources and production without expending huge capital sums on new mine development, and putting them into what Barry Sergeant calls a net cash flow deficit (effectively operating profit less capital and other expenditures).  The gold companies are themselves great believers in the future of gold and while few gold company chief executives may seriously consider some of the stratospheric price increases for bullion predicted by some of the more way out gold proponents, they do believe that there are good price increases ahead which will justify their capital spending and ultimately substantially increase shareholder value.  They are in the gold business for the long term and, as with any investment, there are times when the long term viewpoint seems less inherently profitable than the shorter term view.

Today, too much investment pressure - often exerted by hedge funds and other financial institutions - is frequently short-termist to the extreme and to the detriment of whichever industry they may be pressuring.  There have to be those prepared to take the long term view otherwise sectors of industry will wither and die because no-one is prepared to take the brave decisions, and make the necessary expenditures,  to look further ahead than the short term gain-maximising policies of some of their detractors.

While one may be critical of some financial institutions and hedge funds, I am glad to say there are others out there who believe in the longer term picture - if only as an insurance against the short term vagaries of the market.  Maybe big gold will no longer make you a fortune unless there is a huge rise in the gold price - at which point as we have said before the causes of such could decimate other sectors and lead to all kinds of unwelcome social consequences globally. 

Mind you, if the big gold miners stop pouring investment into the sector then the days of peak gold will definitely be with us and the smaller producers will benefit - but the big ones will gradually decline which is not what their shareholders want.  Many of those investment gurus who we quote in these pages recommend holdings in the strong gold majors like Barrick, Newmont, Goldcorp, AngloGold ashanti, Gold Fields, Kinross etc. and these people have good track records so are worth following too.  Big gold thus does have a future, but perhaps more as a provider of regular dividend income and steady performance rather than explosive growth - and it is still likely the gold premium will continue to give these companies high investment ratings regardless as investors continue to be lured by the glamour, and safety of the yellow metal.

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responses to this article

Big Picture It would be useful to see the gold mining industry cashflow in the perspective of the new mine investment cycle to see if that is the main reason for recent years negative cash flows(excluding reduction of hedge books). by Long timer on March 18 2010, 02:24 Find this comment inappropriate? Report it

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