A Continuing Challenge for Gold Miners

Ima Casanova

July 14, 2022

Gold producing companies are financially strong, and able to fund their growth plans. However, the markets do not seem to like companies spending to find, develop and build mines. Whether it is through an acquisition of an asset or another company, or through the development of one of the company’s assets, the market seems to generally punish the gold stocks on announcements of significant spending towards growth.

However, for companies to continue to create value, they must invest in growth. While growth at any cost is a thing of the past, growth at zero cost is fantasy. The current inflationary environment is complicating things further for the gold sector. Building a mine requires a lot of materials, energy, labor and capital. Capex estimates for new projects are being revised up 20-30% due to cost inflation. The market naturally is spooked by such news, so stocks generally drop when the revisions are announced.

But in reality, in their quest to demonstrate that they can run profitable and sustainable businesses with good returns through the economic cycles, the gold companies have no choice but to explore, build and expand/upgrade mines—even during periods of high inflation. It takes a long time (typically ten or more years) to discover, permit, develop and put a gold deposit in production. Those companies that can manage to do so while maintaining attractive returns should outperform.