Higher gold prices push gold mining stocks up; M&A activity expected

Singapore

GOLD prices recently hit an all-time high above US$2,000 an ounce, but gold miners may not be reaping the benefits of higher selling prices.

Chris Lim, chief executive of Malaysia-based gold miner CNMC Goldmine Holdings, told The Business Times that the Covid-19 pandemic has adversely impacted the gold mining industry as companies have had to dial back operations amid restrictions imposed by governments around the world.

"Artisanal miners have had to sell whatever they can find at steep discounts to spot prices," said Mr Lim, adding that this had led to a "supply glut" in certain markets.

"Gold refineries were also shut down at one point. In addition, the grounding of commercial flights worldwide has made it hard for gold to be transported."

On July 30, CNMC had guided for a net loss for H1 FY2020 on the back of decreased gold output as it had processed lower-grade and reduced quantities of ore over the period.

Wilton Resources, which mines gold in Indonesia, also told BT that travel restrictions had temporarily impacted its employment as well as corporate collaboration with China.

This lacklustre outlook is at odds with the share price performance of both counters. CNMC has gained 18.5 per cent this year while Wilton is up 16.7 per cent. In comparison, the Straits Times Index has fallen 20.5 per cent and the FTSE ST Small-Cap Index is down 17.5 per cent.

As gold prices soared, investors around the world have piled into gold miners. The NYSE Arca Gold Miners Index, which measures the performance of highly capitalised companies in the gold mining industry, is up 34.6 per cent.

The FTSE Gold Mines Index, which reflects the performance of the global market in the shares of gold mining companies, is up 38.2 per cent.

Investors have shown some discernment, though. Among the other Singapore-listed companies with links to gold mines, Anchor Resources has fallen by 30 per cent and Golden Energy and Resources by 0.6 per cent this year.

Are investors overly optimistic about the prospects for gold miners? At least one analyst believes there is still room for gold miners to run.

Edison Group analyst Charles Gibson said: "Since 2002 the prices of gold mining and mining equities in general have almost never been cheaper relative to the price of gold than at the current time."

At the same time, he is expecting some consolidation in the sector. Smaller companies are likely to be "constrained by funding conditions", he said, which could potentially usher in "an era of wholesale consolidation".

CNMC's Mr Lim shares the same view. The way he sees it, larger companies are likely to acquire other miners in a bid to boost production should gold prices continue to rise.

"With a finite supply of gold in the world, I would not be surprised if M&A gains more traction as miners could feel emboldened by record-high gold prices to explore inorganic growth opportunities," said Mr Lim, adding that the industry has been seeing a "spike" in merger and acquisition activity over the past two to three years.

Meanwhile, Wilton Resources is confident that it will deliver on investors' expectations. The company is in the midst of completing a 500 tonne-per-day floatation and carbon-in-leach mineral processing plant. Upon the start of commercial gold production at this plant, the company plans to ramp up its production capacity to 1,500 tonnes per day.

This will increase the company's gold recovery rate and will have an immediate impact on the company's financial results, it said.