Fed Rate Cut Sparks Record Gold Price Amid Global Uncertainty

The long awaited first interest rate cut by the U.S. Federal Reserve (the “Fed”) was no doubt the focus of market participants during September. The Fed initiated its easing cycle with a larger-than-expected 50 basis point rate cut. Gold responded as expected, with the spot price jumping to a new all-time high of $2,685 per ounce (intraday) and $2,672 (at-the-close) on 26 September¹. Gold’s upward trajectory continues to be supported by significant conflict escalation in the Middle East. In addition, the rather unexpected and substantial monetary and fiscal stimulus measures announced by China, boosted the broader metals and mining sector. Gold recorded a 5.24% ($169 per ounce) gain during the month, closing at $2,634.58 on 30 September.

Gold Sector Sees Positive Sentiment, Though Market Risks Remain

With gold reaching fresh highs almost every month so far this year, it is not surprising that the mood at the well-attended Gold Forum Americas and Precious Metals Summit, both hosted each September in Colorado, was positive and upbeat.

Gold mining companies and investors in gold equities may find several encouraging trends, although market volatility warrants attention:

• Record gold prices are translating to record margins and free-cash-flow generation for gold producers
• Supporting continuing debt reductions
• Increasing dividends and share buybacks
• Increasing exploration activities
• Improved ability to fund growth projects

Risks to keep in mind as an investor:

• Increased gold prices introduce significant volatility risks, as prices may fluctuate due to geopolitical events.
• Unforeseen operational costs or delays may hamper financial stability, impacting debt reduction efforts.
• Dividend and share buybacks could be reduced if market conditions worsen or if companies face internal financial pressures.
• Exploration activities may increase, but unsuccessful exploration can lead to significant financial losses.
• Funding growth projects may lead to higher debt levels if gold prices decline or project timelines extend.

Strong Financial Performance

The sector has been stable for several years. Recently, unexpected inflation pushed costs higher, which led to companies missing their targets and disappointing investors, especially in 2022. However, companies worked on cutting costs and improving efficiency, which helped manage these rising costs. Now that inflation has eased, their operating costs are more under control.

As the gold price rises, so do margins for gold producers. In Q3 2024, the average gold price reached a record $2,474 per ounce, compared to $1,927 per ounce in Q3 2023. This increase in price has led to approximately a 100% expansion in operating margins. This means that the profit margin on producing gold has roughly doubled. If a gold producer’s cost per ounce remains stable, a higher sale price translates directly into higher profit per ounce. This margin expansion is a key reason for the current enthusiasm in the gold equity market.

Strategic Focus and Confidence

We met and attended presentations with over 50 companies at the Gold Forum Americas, and another 35 companies at the Precious Metals Summit. The message from the producers has not changed much over the last couple of years:

• Focus on value creation through cost control
• Operational efficiencies
• Disciplined deployment of growth capital
• Commitment to shareholder returns

The key distinction this time around was that the management teams appeared more confident in their abilities to carry out their strategies and more comfortable discussing growth plans. All of this was afforded by the benefits of a much higher gold price. Companies continue to emphasize their focus on quality over quantity and on value over volumes, which to us is a very positive signal.

Potential M&A activities as junior mining companies explore consolidation opportunities

The junior companies (developers and emerging producers) were busy meeting with other companies at the conferences, which could lead to an increase in sector M&A. This is good news, as we believe the gold sector is very much in need of consolidation. At these gold prices, more projects are viable, leading to potential expansion of the junior investment universe. However, permitting timelines have not improved, and this has significantly impacted the single asset, smaller companies, in development stage. Projects simply take longer to build, while the market is unwilling to wait. With gold at all-time highs, the focus is on cash flow generation in the short and medium term. The companies with long timelines to production have generally underperformed.

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