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The gold price trended lower in February, as a favorable growth outlook caused a continued sharp rise in Treasury yields, driven by increasing odds of more fiscal stimulus, declining Covid infection rates and strong retail sales and manufacturing data. Higher rates also allowed the dollar to firm, adding further headwinds to gold. Gold reached its low for the month on 26 February at $1,717 per ounce and finished at $1,734.04 per ounce for a $113.61 (6.2%) loss.
Many of the larger gold companies have released their year-end results and guidance, which have been in line with expectations both operationally and financially. Moves to enhance returns to shareholders continue, as some of the larger companies increased their dividends to yields of over 3.5%. Despite that good news, gold stocks sold off with gold, as the NYSE Arca Gold Miners Index (GDMNTR)1 fell 9.6% and the MVIS Global Junior Gold Miners Index (MVGDXJTR)2 declined 8.3%.
Gold’s performance this year has been disappointing. Gold prices have been under pressure since the Pfizer vaccine announcement in early November. This, along with the $1.9 trillion stimulus bill, created an outlook for strong economic growth and euphoria in the markets. Gold, as a safe haven, will continue to struggle so long as this outlook prevails, possibly through the first half. Consequently, we have downgraded our near-term outlook from a consolidation to a correction in which we expect gold to trade above $1,600.
We expect a catalyst to emerge in the second half that once again drives gold higher. The most likely catalyst would be excessive inflationary expectations. Inflation expectations have returned to pre-pandemic norms, although a number of developments suggest it could spiral out of control:
Further into 2022, once the trillions of stimulus dollars have been spent, other systemic risk catalysts could emerge, such as a weakening economy, debt problems, dollar weakness and/or black swans caused by radical fiscal and monetary policies. We believe the long-term bull market can possibly remain intact and could expect prices to ultimately surpass $3,000 per ounce.
Due to the nature of the business, gold companies have high ESG risks. In our April 2019 and January 2020 Manager Commentaries, we addressed the excellent job companies do in managing these risks. However, historically managements have done a poor job of reporting their ESG activities and accomplishments to the public. That is rapidly changing as ESG gains equal time to operations and finance in reports, meetings and calls with investors. Company websites have entire sections on sustainability, while the quantity and quality of information is improving. We invest in companies that do an excellent job of managing social issues, water, tailings, reclamation, safety and health.
In our view, the most challenging aspect of ESG for mining companies will be greenhouse gas (GHG) emissions. The Paris Agreement has become the accepted standard, calling for net-zero GHG emissions by 2050. While such a goal will be a monumental challenge for all mining companies, some will be less challenged than others. GHG emissions are measured in millions of tonnes of carbon dioxide (MtCO2) and classified as Scope 1 (direct – mainly from mine equipment), Scope 2 (indirect - mainly from the power grid) and Scope 3 (value chain – downstream from the mine). Jeffries Equity Research found 2019 Scope 1 and 2 emissions across 18 large mining companies totals 192.6 MtCO2, while Scope 3 totals 2,467.3 MtCO2. Companies involved in iron ore, bauxite (raw aluminum) and coal carry much higher scope 3 emissions. In the following table, we compare GHG emissions of Newmont, the largest gold company, with BHP, the largest diversified miner:
Source: Jeffries Equity Research, Bloomberg, VanEck Research.
The table shows that some miners are clearly in another league when it comes to emissions challenges.
Amongst the gold miners, Newmont took the lead when in November, the company announced climate targets of a 30% reduction in GHG emissions by 2030, and a goal of net zero carbon emissions by 2050. We conduct ESG meetings with all of the producers in our portfolio and all are in the process of formulating emissions goals that we expect in the coming year. Looking at the large miners that have already set goals, we find strategies that are lacking in detail. The wave of ESG investing has happened too quickly for most heavy industries to get a grip on what exactly net-zero emissions will entail. It is a work in progress. According to a Wood Mackenzie study of 31 major gold mining companies published by the World Gold Council, around 95% of emissions are associated with purchased power or fuel combustion. This means that the miners will rely heavily on power companies and equipment suppliers to meet their goals.
Power Consumption - Based on the current status and known plans of the gold mining industry, Wood Mackenzie finds that the emissions intensity of power used in gold production is estimated to fall by 35% by 2030 as follows:
We regard this as the low hanging fruit. Advancements in technology and lower costs for batteries and renewable energy will be needed in order for power consumption to reach net zero by 2050.
Heavy equipment - The other major source of GHG emissions are diesel-powered trucks, loaders, dozers and other mine-site equipment. Two of the larger gold companies have underground mines in Ontario, Canada where most of the equipment is electric. Just five years ago, the battery technology did not exist to enable electric underground equipment to operate efficiently. Coupled with hydro-electric grid power, the carbon footprint is relatively small. These two mines are on the cutting edge of a trend toward electrification of underground mines that we expect to see in the coming decade.
Open pit mines present a bigger challenge than underground mines because they run such massive equipment. Two years ago the International Council on Mining and Metals (ICMM) announced an initiative backed by 27 of the world’s biggest miners and 18 original equipment manufacturers (OEMs) to have GHG-free open pit mining vehicles used widely by 2040. ICMM members have reviewed over 650 mines to assess what’s needed to reach the program’s goals and this year they will look to integrate the initiative into corporate planning processes.
All company, sector, and sub-industry weightings as of 28 February 2021, unless otherwise noted. Source: VanEck, FactSet.
1NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold.
2MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.
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