Why gold equities are continuing to underperform the gold price

JOHANNESBURG (miningweekly.com) – Why is it that gold equities are continuing to underperform the gold price? That is a question Mining Weekly put to Barrick president and CEO Dr Mark Bristow after he noted the lag of gold equities during the presentation of the third-quarter results of his New York- and Toronto-listed gold and copper mining company.

The gold equity underperformance comes amid demand for physical gold putting upward pressure on the gold price as de-dollarisation within the central bank reserve balances takes place.

“So, you’re effectively seeing a switching of dollars for gold in the central banks, particularly the emerging market central banks,” Bristow outlined in an interview with Mining Weekly.

The two biggest owners of treasury bonds are China and Japan. Then, again, even retail physical gold sales at Costco have been evident. Interestingly, the Western world playing in the gold space was not that apparent until two months ago.

“Over the last two months we’ve seen an increased inflow of ETF gold, and that's Western investors investing in gold. When you look at it, one can interpret that investment in physical gold is the ultimate hedge against risk.

“As the gold price has moved up, one would expect that there would be more and more interest in gearing that gold movement, and the best way to do that is with equities. But at the same time, there's been a redemption within most of the gold specialist funds, as people take profits, and people are trying to position themselves, I guess, for the next phase in investment opportunities. It sounds contrary, but we were a bunch of investors and there's a logic to the fact that at a high gold price, you start seeing people taking their money out of gold funds.

“So, it's a complex situation. It's people wrestling with risk and to complicate it, you've seen the equities reach. You know, more and more eyes, although the gold price itself has outperformed the S&P, and I think the gold industry and the mining industry in general is at a place where there's a shortage of optionality. The mining industry, apart from Barrick, hasn't invested in exploration, which brings optionality into the stock.

“That's the traditional driver of premiums in the gold industry, we haven't seen that. What we've seen rather is fund managers and investors demanding short-term gratification, instant gratification, from equity, and as you know, the mining business is a long game with long-term capital. So, it's a complicated situation, and, that's what I'm managing in Barrick. I've always created value over the long term. It's my driver. It's the very foundation of our Randgold DNA, which is now Barrick’s DNA and that doesn't always fit neatly with short-termism.

“Physical gold investment is a long-term hedge against global risk. But everyone has become very short term on equity, and that's driving most of the equities. But gold has not performed as well as some of the other equities, and that's where the generalists are right now. They’re in IT stocks and the big global innovation stocks; that makes sense,” Bristow pointed out.

What is Barrick planning to do to increase gold equity demand, or increase demand for Barrick equity?

We don’t need to raise money in the market. We're effectively independent of the market and so what we need is patient, long-term investors. You would have seen that our net earnings were up 33%, cash flow up 27%. We bought back some more stock because we don't believe that we're optimally priced and we also reduced debt. We want a strong balance sheet so that we can remain independent given our big growth projects that we will start building next year. There were many years that we built that value foundation in Randgold before the market recognised the real value that Randgold brought in, and we're building that in Barrick. Already, if you look at our business, we’re pointing to 30% organic growth. We don't need other people's money to deliver on those objectives. We’re building that optionality within our stock price enabling investors to buy something that's got the upside such as Barrick. That’s our focus.

How is Barrick ensuring that it closes its non-operating tailings storage facilities safely and in an environment-friendly manner?

These tailings are liabilities that were bought in North America in that over-exuberant period when Barrick ran around buying everything, and in many cases, they bought more liabilities than they even understood, and that's a risk associated with M&A at the top of the market, which we’ve witnessed in the last few quarters. The mining industry today is growing its closure liability, and we're shrinking it. We've reduced our closure liability by 36% since the beginning of the merger with Randgold.

Why aren't you first recovering the gold from the tailings and then closing them?

We’ve done that with some of our mines and Morila was a very good example. Remember, the tailings dam mining in South Africa is often associated with very old mines that had inefficient processing facilities and super high grades. When you’re mining and processing 20 g/t, or even 10 g/t, and you’re getting 90% out, still one to two grams is in the tailings dam, and that's a great business at these gold prices. But a lot of the tailings dams that we are dealing with, legacy dams, are a product of much lower-grade processes. We check all these tailings dams for viability as far as reprocessing goes. It’s part of the closure.

You spoke about skills being in short supply in the US and you are planning to automate. In what respect will you automate?

Labour is expensive in the US and if there's one model for where automation may pay real returns is when you have expensive labour, and then not a lot of it. We've invested heavily in Nevada. There's always labour turnover in a developed economy when it comes to hard work. We feel that if we’re going to pioneer a viable automation integration, America is a good place to start. But having said that, we have just completed our first one-mine proof-of-concept, which is a fully integrated, digitalised mine in Kibali. Now that we've got it working, we’re also rolling that out across the organisation. That's really pulling together all the data nodes that sit on our process controls and machine optimisation software. People are very quick to refer to AI, but it's a little bit different because we're not intelligent yet. We're very smart in data processing, and that's what we are using to further optimise our capital base, particularly in processing. We do it in new, modern big trucks and underground equipment. They all have enormous data points, which you can use to monitor and manage machine efficiency and planned maintenance, et cetera. So, Barrick is moving towards that integrated real-time data and ability to process it for many aspects.

Is the whole of Kibali digitised or just a section of it?

It’s the whole of Kibali as part of the one-mine policy. We have one mine so we can see the whole mine, whether it's the underground production or the processing throughput or the recoveries, or whatever. Kibali is one of our most automated mines, and so we used it as our proof-of-concept and based on that, we can now look to roll it out, and we're busy doing that across the group.

How long did it take to digitise Kibali?

About 10 to 12 months. It’s quite fast. We introduced digitisation as a group initiative, so we’ve all watched it and been part of it, and now we’re educating the different regions to be able to roll out digitalisation across their mines as well.

It’s interesting that it's coming out of Africa.

That's where the real leverage sits and what we're using to put Barrick back on the map.

You said it's a mystery why Reko Diq isn't recognised for the contribution it has the potential to make. Why do you think Reko Diq is failing to be recognised?

Perception brings a lot of prejudice in emerging markets. When we acquired Moto mines to build Kibali, there was lots of apprehension about whether it was doable and Kibali has been a fantastic investment. We brought in AngloGold Ashanti just to share the risk but I think there's nobody in our register who would argue against the fact that maybe we should have done the whole lot. But we are 50:50 in Reka Diq as well.

POSITIONED TO COPE WITH CYCLES

Barrick's continuing investment in its future and its ability to uncover and unlock the value opportunities embedded in its global asset portfolio position it to capitalise on the current market fundamentals as well as to continue strongly throughout the future cycles, which are inevitable.

The business is built on growing profitably without the need for mergers or acquisitions.

While 2024 has been a challenging year in many ways, Barrick’s quarter-three performance arrows point in the right direction, and the company believes a foundation has been laid for a strong fourth quarter, which should enable it to end the year at the lower end of its group gold and copper production guidance range.

The higher margins in its gold operations, driven by the higher gold price and cost discipline, are in addition to the ongoing investments in infrastructure in Nevada gold mines in the US, ongoing plant ramp-up at the flagship growth project, Pueblo Viejo, in Dominican Republic, and the progress being made with Lumwana and Reko Diq.