In the previous part of this series, we looked at miners’ geographic exposure, which is important to consider given the geopolitical risks that various jurisdictions face. It’s equally important to consider miners’ commodity exposure.
Product composition exposes miners to various types of commodities, which in turn impacts their revenues and profitability. While some miners 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 ETF (GLD), which tracks gold prices, rose 12% YTD on November 25, 2016. The iShares Silver Trust ETF (SLV) rose 19% on the same date, which benefited senior miners with exposure to silver.
Miners with copper exposure
In 3Q16, 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 Gold is looking to divest its non-core assets, including its Zaldivar and Lumwana copper mines.
Going forward, we should see a lower contribution from copper to Barrick Gold’s revenue. For 3Q16, 10% of Yamana Gold’s (AUY) revenues came from copper sales.
For 3Q16, copper revenues contributed just 4% of Newmont Mining’s (NEM) overall revenues compared with 12% in 2Q16. This fall is due to the divestment of NEM’s interest in the Batu Hijau mine.
Precious metals versus base metals
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.
Precious metal prices were strong during the first half of 2016. However, after Donald Trump’s presidential win on November 8, industrial metals have outperformed precious metals. However, investors looking for pure-play precious metal exposure may still avoid companies with diversified exposure to base metals.
Next, we’ll look at the outlook for gold miners’ production growth.