Dear Friend of GATA and Gold:
Barron's this week has a surprisingly favorable report about the prospects for the gold price and gold miners in light of the recent Newmont-Goldcorp and Barrick-Randgold combinations. But the report repeats without question the worst misinformation about the gold price, quoting a fund manager as saying gold is attractive because "it's an alternative currency whose supply can't be increased much."
Of course the longstanding disparagement of the failure of the gold price to keep up with inflation arises precisely from the unchecked increase in the supply of imaginary gold -- "paper gold" -- by central banks and their bullion bank agents.Your secretary/treasurer has tried posting this comment at the bottom of the Barron's story but the magazine doesn't seem to want to allow it:
"The problem is that, contrary to fund manager Keith Trauner's comment, the gold supply not only can be increased much but has been increased much by gold swapping and leasing by central banks to bullion banks. Some expert analysis suggests that 'paper' gold -- unbacked claims issued by central banks and bullion banks -- have created as many as 90 or 100 claims to every ounce of gold actually in possession by the issuers of the claims. This explains the longstanding disparagement of gold: that its price in recent decades has not kept pace with inflation. Fund managers and gold miners alike should review the work done in this respect by the Gold Anti-Trust Action Committee at gata.org."
Maybe others can try posting similar comments there to get the magazine's attention.
The Barron's report is headlined "Why Gold Mining Stocks Are an Unalloyed Bargain" and it's appended.
CHRIS POWELL, Secretary/TreasurerGold Anti-Trust Action Committee Inc.CPowell@GATA.org
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Why Gold Mining Stocks Are an Unalloyed Bargain
By Andrew BaryBarron's, New YorkFriday, January 18, 2019
https://www.barrons.com/articles/why-gold-mining-stocks-are-an-unalloyed...
Two multibillion-dollar mergers in gold mining are a sign of hope for a sector that has been among the worst-performing group of stocks over the last seven years.
Newmont Mining has agreed to buy Goldcorp in a $10 billion deal. That follows the recent closing of a merger between Barrick Gold and Randgold Resources.
The transactions will create the two largest gold miners in the world, giving them additional scale and solidifying their balance sheets in what remains a difficult industry struggling to identify attractive new mines and replace current production.
"Barrick and Newmont are vehicles for generalist investors to position for a higher gold price," says John Bridges, an analyst with J.P. Morgan. "By making these changes, they will become more stable, with better-quality earnings in order to deliver that service to investors."
Investors seemed skeptical last week after the all-stock Goldcorp deal was announced, as Newmont shares fell 9%, to $31, near a 52-week low of $29. Investors are concerned about the quality of Goldcorp's assets in light of operational and financial setbacks.
Yet both Newmont and Barrick look appealing. Their stocks, trading at low valuations relative to their history, do not reflect positive changes in the industry or signs of life in the market for gold.
And in a business not known for great management, Barrick is now headed by the industry's biggest star in Mark Bristow, the former CEO of Randgold.
Bristow is a swashbuckling South African and big-game hunter with a background as a geologist. Shares of Randgold rose one-hundred-fold over the more than 20 years he spent at the helm.
Barrick, based in Toronto, is down 12% this year, to around $12, and trades for 26 times projected 2019 earnings. It yields 1.3%. Denver-based Newmont, the longtime industry leader and the only gold stock in the S&P 500, trades for 26 times projected 2019 earnings of $1.21. It yields 1.8%, the highest among the big gold producers.
Barrick and Newmont aren't cheap based on current earnings, but they offer what mining investors call "option value"--or exposure to higher earnings that would come from increased gold prices.
On that score, there is hope. The often-maligned metal has been living up to its reputation as a hedge against financial dislocations since the stock-market high this summer. Gold has risen to about $1,280 an ounce from under $1,200 in August. (Barron's wrote a bullish cover story on the metal and the stocks in September.)
One reason for an improving outlook for gold is that the Federal Reserve appears to have halted its campaign of interest-rate increases. Higher rates are generally bearish for gold because they make holding dollars and other paper currencies more appealing relative to the metal, which yields nothing.
Reflecting the disfavor of the mining stocks, the VanEck Vectors Gold Miners exchange-traded fund (GDX) is down more than 65% from its 2011 peak.
Gold has held up better, dropping 30% from a 2011 high of $1,900 an ounce. Investors have effectively downgraded the gold mining stocks after the companies spent heavily on mines and generated relatively little new production.
Compared with an explosion in debt and currency, what makes "gold attractive is that it's an alternative currency whose supply can't be increased much," says Keith Trauner, co-manager of the GoodHaven mutual fund (GOODX), which owns Barrick shares. Annual mined supply adds less than 2% year to the world's gold, which is estimated to total about six billion ounces, worth about $8 trillion.
Newmont paid a 17% premium for Goldcorp, whose shares gained 7%, to $10.35, last week. But the price was well below Goldcorp's 52-week high of $15. Goldcorp shares traded close to the deal price amid speculation that there could be a higher bid for the company.
Goldcorp had a tough 2018, when its production of 2.3 million ounces failed to hit a target of 2.5 million. The company declined to provide 2019 production guidance on last week's conference call.
The uncertainty about the Goldcorp asset base and "production profile" is a "key market debate" that "doesn't appear will soon be answered," Barclays analyst Matthew Murphy wrote last week.
Newmont's most valuable mines are in Nevada, Australia, and Ghana, while Goldcorp's are in Canada and South America.
The deal "is not about getting bigger," Newmont's chief executive, Gary Goldberg, tells Barron's. "Newmont is focused on value, not volume."
The two companies aim to produce six million to seven million ounces annually of gold after divestitures, a level that Goldberg thinks can be maintained for at least a decade. All projects must meet a 15% annualized return hurdle, he says.
Canaccord Genuity Capital Markets analyst Carey MacRury upgraded Newmont to Buy from Hold last week, noting that its "steady gold production, strong balance sheet, low geopolitical risk, trading liquidity, and deep project pipeline stack up well against senior peers."
The Barrick story has a lot to do with the Bristow. "You're marrying the industry's best management team with a rich roster of currently producing assets and development prospects," Trauner says.
In a show of confidence after the Randgold deal was announced in September, John Thornton, the Barrick chairman and a former top Goldman Sachs executive, bought 2.3 million shares at around $11 a share, nearly doubling his stake.
Under Thornton's leadership, Barrick cut its heavy debt load. Bristow will focus on improving operations while trying to resolve a dispute with Tanzania over a mine majority-controlled by Barrick.
With gold prices starting to stir and the mining industry acting more rationally, the sector may finally start to shine.* * *
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