In the previous part of this series, we looked at miners’ geographic exposure, which is important to consider given the geopolitical risks various jurisdictions face. It’s equally important to consider their revenue compositions in terms of commodity exposure.
Product composition exposes miners to various types of commodities, which in turn impacts their revenues and profitability. So while some produce copper, others produce silver, lead, or zinc as byproducts along with gold.
Silver has outperformed gold YTD (year-to-date). The SPDR Gold Shares (GLD), which tracks gold prices, has risen 17% YTD as of June 21, 2016. The iShares Silver Trust (SLV), which tracks silver prices, has risen 24% as of the same date. This has benefited senior miners with exposure to silver.
Miners with copper exposure
In 2Q16, Barrick Gold (ABX) generated 5% of its revenue from copper. It announced the sale of 50% of its interest in the Zaldivar copper mine in Chile in 2Q15. Several media reports have suggested that Barrick is looking to divest its non-core assets, including its Zaldivar and Lumwana copper mines. Going forward, we’ll likely see a lower contribution from copper to Barrick’s revenue.
Among senior gold miners, Newmont Mining (NEM) and Yamana Gold (AUY) have some of the highest exposures to copper. For 2Q16, copper revenues contributed 12% of Newmont’s overall revenues and 16% of Yamana’s. With the sale of the Batu Hijau mine, however, Newmont’s exposure to copper has declined significantly.
The dynamics for base metal prices are quite different compared to precious metals. Gold and silver are used as an inflation hedge and a safe haven in times of economic and political turmoil. Copper and other base metals are mainly used as a proxy for industrial growth.
While precious metal prices are strong in 2016, we can’t say the same about copper prices. Investors looking for pure-play precious metal exposure may avoid companies with diversified exposure to base metals.
Next, we’ll look at the outlook for gold miners’ production growth.