Top gold miners' shares underperform surging gold price as investors remain wary

Share prices of major gold producers have underperformed record-breaking gold prices, but signs of easing cost pressures could help them close the gap.

The London Bullion Market Association (LBMA) gold price hit a new high of $2,330.31 per ounce on April 8, up 12.8% year to date, spurring analysts to contemplate $2,500/oz levels by the end of the year. Demand for gold as a safe haven has remained strong, despite the strengthening dollar, as "the troubled global geopolitical scene is trumping economic concerns," S&P Global Commodity Insights analyst Aude Marjolin said April 8.

Jeff Quartermaine, chairman and CEO of Perseus Mining. Source: Perseus Mining.

The average share price of 11 of the largest gold producers that mined over 500,000 ounces in 2023 has underperformed the rising gold price since the start of 2022, according to an analysis of S&P Global Market Intelligence data.

However, Commodity Insights' current consensus forecasts indicate that consolidated all-in sustaining costs for those 11 gold miners are set to fall through 2028, providing a catalyst for some upside to their future performance.

Consensus commodity price targets also see the gold price averaging $1,964.55/oz in 2028. Despite this long-term optimism that the gold price will continue to hover around the $2,000 mark, for now, investors are wary of gold producers for a string of reasons, according to Jeff Quartermaine, chairman and CEO of Perseus Mining Ltd.

"The reality is that for a lot of them, the general comment is: 'We don't want to invest in gold equities. We like some gold exposure, but no one makes any money investing in gold equities,'" Quartermaine told Commodity Insights.

"When talking to investors, it's almost: 'Which box am I going to tick today as an excuse for not investing?'" the CEO said. "This is what we've been told: They want scale. They want asset quality. They want growth. They want cash flow and they want high-quality management."

Pain points, flight to ETFs

Perseus saw higher margins and steady costs in 2023 compared with 2022 thanks to higher sales from Sissingue and Yaoure in Côte d'Ivoire, but "this is not the normal story" for the gold sector, Quartermaine said.

While Perseus' steel and freight costs have eased in the past 1.5 years, "there is [still] plenty of pressure on costs. Anybody who says any different is not facing the reality," Quartermaine said. The CEO cited a "real squeeze" on explosives used in blast mining that started when Ukraine was invaded by Russia, which supplies most of the ingredients.

Cost inflation in oil prices, wages and reagents has pressured Australian gold producers' shares, financial services firm Euroz Hartleys said in a March 20 note.

The trend toward greater indexation of stocks — the move to more passive from active investing — over the past five to seven years has also hurt gold miners because it disadvantages micro-caps, said Joe Mazumdar, analyst at Exploration Insights. Many ETFs have volume and market capitalization requirements, precluding gold equities at the smaller end of the scale from benefiting from ETF volume. Meanwhile, there are fewer active managers willing to play the juniors, Mazumdar told Commodity Insights.

"The reason for [gold equities'] underperformance relates to both the asset management markets and the mining projects themselves," Peter Grosskopf, CEO of SCP Resource Finance LP, told Commodity Insights. "Asset management has shifted dramatically towards indexation with the result that mining sector funds have been drained of capital, and also forced increasingly into large-cap, index-like strategies."

Grosskopf pointed to "much longer project timelines" in the gold space and the fact that many miners have "badly missed their capital cost estimates, disappointing their shareholders." This has resulted in "record-wide valuation discounts, which we think represents an opportunity."

Cost pressures easing

Ten of the 11 analyzed gold miners saw narrower all-in sustaining cost margins in 2023, while Pan American Silver Corp.'s margin grew by 9.2% year over year.

Of the 11 miners analyzed, Newmont Corp. was the worst performing stock against the gold price. This is despite enjoying the largest percentage increase in total shares owned by institutional investors among the top 10 biggest miners and increasing its lead as the world's biggest gold miner after acquiring Newcrest Mining Ltd.

Newmont had an all-in sustaining gold cost of $1,444/oz in the fourth quarter of 2023, but it plans to lower this to about $1,150/oz by 2027 by boosting metal production and improving costs, CEO Tom Palmer told analysts in February.

Euroz Hartleys believes that gold equities will "re-rate as stronger quarterlies are released" for the March quarter, helped by easing cost pressures as the gold price rises.