Why gold mining companies and not gold?
According to Citi, gold mining companies will be the best way to chase the current gold rally. On a YTD (year-to-date) basis, the VanEck Vectors Gold Miners ETF (GDX) has risen by 125.51%, while the SPDR Gold Shares (GLD) has risen by ~27.8% as of August 2, 2016.
Notably, the VanEck Vectors Gold Miners ETF (GDX), which tracks the performance of gold mining companies, has outperformed the SPDR Gold Shares (GLD), which tracks the performance of physical gold. The reason is that with every one-dollar rise in gold prices, operations and financial leverage shows gold mining companies outperforming physical gold.
Newmont Mining and Barrick Gold
Gold mining companies such as Newmont Mining and Barrick Gold have returned 193%, and 144%, respectively, YTD as of August 03, 2016. The AISC (all-in sustaining costs) for Newmont Mining (NEM) and Barrick Gold (ABX) in 2Q16 have reached $876 per ounce and $782 per ounce, respectively. By 2019, Barrick Gold plans to cut its AISC to below $700 per ounce.
According to Citi, Barrick Gold will continue its turnaround program, and its deleveraging model should add more value to the company while its low-cost mining business model should generate higher returns. According to Citi (C) analyst Alexander Hacking, “Newmont Mining has the highest potential to return capital to shareholders via dividends and/or buybacks.”
Meanwhile, the 2016 cost outlook for Newmont Mining (NEM) fell by $10 per ounce. Also, the company has stated that there is potential to cut costs further by $25–$75 per ounce for its future growth projects. The cost guidance of these two mining companies will lead to high profitable matrix and business value for its shareholders.
For more on gold, you might be interested in reading “How Barrick Gold’s 2Q Results Position It for 2nd Half of 2016.”