Buying gold stocks has been a popular strategy in the Australian share market, fuelled by the precious metal’s impressive surge this year, driven by safe-haven demand and central bank activity. However, an analysis by The Australian Financial Review reveals a mixed bag for investors over the past decade. Of 172 gold mining stocks identified in 2015, only 100 remain listed today. The rest vanished from the ASX due to financial difficulties or takeovers, while the survivors have delivered an average return of just 3 per cent per year. Fund managers note that while gold producers often lag the spot price, which currently exceeds $US4000 an ounce, they also carry significant risk.
Western Australian gold miner Capricorn Metals is a standout performer, boasting a 56 per cent annual return over the past decade. Bellevue Gold, Beacon Minerals, and Genesis Minerals closely follow, all achieving returns above 47 per cent. Other notable performers include Northern Star, Evolution Mining, Ramelius, and Perseus, with returns exceeding 25 per cent annually. However, roughly 40 per cent of the surviving gold stocks have posted negative returns over the past decade, resulting in losses for shareholders. Atlas Funds Management’s chief investment officer, Hugh Dive, points out that the correlation between gold prices and gold stocks isn’t always straightforward, as rising costs can erode profit margins.
Argonaut portfolio manager David Franklyn highlights that mining for gold is more complex than extracting other commodities, due to its erratic vein patterns, making it difficult to assess reserves accurately. This complexity often leads to production issues, impacting even industry giants like Northern Star and Newcrest (now Newmont), which have faced disruptions in recent years. Investing in gold miners requires careful risk management, considering factors such as mine location, asset quality, and the management team’s ability to control operating costs. Genesis and Capricorn are examples of standouts, but even companies like St Barbara are considered, despite their high-risk locations.
Morningstar analyst Jon Mills emphasises the importance of cost control, citing Agnico Eagle’s superior performance compared to Barrick Gold due to better cost management. However, the ultimate driver remains the gold price. Investors should be wary of junior miners, as their capital costs can outweigh their market capitalisation, making their survival precarious. Dive remains cautious, stating gold stocks are hard to model. Capricorn Metals is a Western Australian-based gold mining company. Genesis Minerals is another Australian gold mining company focused on developing and operating gold projects.
