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Gold Opportunities in the Outback

September 12, 2023

Read Time 7 MIN

A stronger dollar and higher bond yields pressured gold prices in August. Emphases on technology, mining techniques and efficiencies and ESG-related subjects create opportunities in Australia.

Monthly gold market and economic insights from Imaru Casanova, Portfolio Manager, featuring her unique views on mining and gold’s portfolio benefits. An expanded PDF version of this commentary, including fund specific information can be downloaded here.

Gold reacts to Fed, dollar strength

Gold gave back some of its July gains during the month of August. The markets continue to focus on the U.S. Federal Reserve’s (Fed’s) path. Indications that Fed policy may remain tighter for longer, with the potential for another hike this year, supported a stronger dollar and higher bond yields, putting pressure on gold prices. The U.S. Dollar Index (DXY)1 was up 1.7% in August, and the U.S. 10-year treasury yield touched a high of 4.34%, its highest level since 2007. Gold fell below $1,900 per ounce, trading at a low of $1,889 on August 18, with persistent outflows out of gold bullion exchange traded funds during the month. But once again, gold showed resilience climbing back above $1,900 only a week later. Towards month-end, reported declines in U.S. consumer confidence and job openings reduced the implied probability of a Fed hike this year. With treasury yields and the dollar easing, gold found some support to close at $1,940 per ounce on August 31, posting a loss of $25 per ounce (-1.3%) for the month.

Gap remains for gold miners

The NYSE Arca Gold Miners Index (GDMNTR)2 and the MVIS Global Juniors Gold Miners Index (MVGDXJTR)3 were down 6.1% and 3.7% respectively during the month. The smaller gold companies outperformed their larger peers; however, the valuation gap between gold equities and gold bullion widened further. Gold prices are up 6.4% year to date, yet the GDMNTR is up only 3.1%. We have been stressing both that the equities are trading at a discount relative to gold, and that they are trading at historically low multiples. An analysis by Paradigm Capital for a universe of large and intermediate gold producers, found that based on consensus expectations, gold miners are trading at a 2024 EV/EBITDA* ratio representing about a 35% discount to their 10-year historical average. For reference, the S&P 500 Index4 is trading at a 2023 EV/EBITDA ratio that is over 10% above its 10-year average, and even with estimates coming down for next year, 2024 EV/EBITDA consensus ratio is right in line with the 10-year average. With gold prices near all-time highs, we think investors should take a hard look at gold mining equities and consider the sector’s potential for future stock price appreciation, as compared to other industries.

On the road in Australia

We recently had the opportunity to travel across the continent of Australia. Given the distance travelled, we made sure to maximize the trip by visiting as many operations and meeting with as many companies as we could fit in. We met with the management teams of eight companies and toured six major gold mining operations, including open pit and underground mines. We could not help but be impressed with the size and scale of some operations (e.g., Boddington), and the richness in grade of others (e.g., Bellevue and Fosterville). Across the board we noticed a focus on the latest technology, mining techniques and efficiencies, as well as a laser-like focus on Environmental, Social and Governance (ESG)-related subjects. In our view, Australia remains a leading mining jurisdiction, both in terms of potential and investability (currently, based on company reserves, Australia represents approximately 15% of the portfolio’s total exposure). Key issues that we discussed with management teams include: the focus on de-carbonizing energy usage; skilled labor shortages; and the role of technology in mining to reduce costs, improve efficiency and make mining safer for workers.

For context, Australia was the second (tied with Russia, and only slightly behind China) largest producer of gold in 2022 – mining over 10% of the world’s annual supply according to the United States Geological Survey. On a reserve basis, the country is reported to have over 16% of the world’s in-ground gold. During our trip, we visited mines representing approximately 22% of Australia’s annual gold output. Increased exploration efforts, regional consolidation leading to efficiencies of scale, continued focus on optimization and cost control along with historically high gold prices should contribute to a vibrant gold mining industry for the foreseeable future.

Here are some of the key takeaways from our trip:

  • While raw material input prices now appear to be receding, skilled labor shortages in Australia continue to impact both costs and volumes, despite the reversal of COVID-related impacts last year.
    • High bulk material prices (iron ore, coal, lithium) and government funded project stimulus have sharply increased competition for skilled labor. This has led to higher wages in the mining industry as companies raise salaries to retain or attract talent, including for those candidates coming right out of university. Anecdotally, we heard that a salary of A$150,000 for a junior engineer is not uncommon.
    • Fly-In-Fly-Out operations, largely in Western Australia (e.g., Bellevue and Gruyere), facilitate ‘mercenary’ type labor behavior. For example, miners, mechanics and engineers based near Perth, can chase the highest compensation without having to move or relocate their families.
    • Operations located within driving distance of major population centers (e.g., Boddington, Fosterville) benefit both from lower labor rates and lower turnover.
    • Gold miners are attempting to meet this labor challenge through aggressive recruiting/hiring, training of recent university graduates in adjacent fields (such as civil engineering) and through automation and technology.
  • Australia leads the industry in technology, with remote control and automated vehicle adoption set to drive continuous improvement in costs, production and safety.
    • At Fosterville and Cowal, we had the opportunity to visit the control room and observe above-ground operators controlling vehicles operating underground. This technology is deployed when ground conditions present a safety concern for workers and utilized during shift changes to smooth operations and maximize volumes.
    • The most striking technology adoption we witnessed was at Newmont’s (3.60% of Strategy net assets) Boddington operations. There, we saw the largest automated haul fleet in the gold industry. Boddington is currently operating 35 fully automated Cat® 793 (400 ton) haul trucks and expects to increase the fleet to 40. The full benefits realized by Boddington’s automated fleet compared to a conventional fleet have yet to be quantified, but we expect the gains to be significant.
    • At Gruyere, a 50/50 Joint Venture between Gold Fields (0.41% of Strategy net assets) and Gold Road (not held in Strategy), management is considering automating their drill fleet to both gain efficiencies and to reduce labor costs. Operations have been recently hampered by a lack of drilling capacity.
    • At Fosterville and Boddington, vehicles are monitored and tracked at all times, including vehicles operating underground, which is something we have not seen before. While this should clearly benefit safety performance, we would also expect improved operating performance and longer equipment life.
  • Throughout Australia, we noticed an emphasis on ESG, and specifically, on the mandate to reduce greenhouse gas (GHG) emissions. Gold producers are aggressively pursuing energy efficiency and alternative power generation (largely solar and wind) to achieve near-term 2030 targets using currently available technology.
    • The Australian mining industry is generally well positioned to invest in these non-petroleum sources of power due to remote operations currently relying on self-owned, high-cost diesel power generation. The existing diesel power (a sunk cost) has the benefit of supplementing alternative, but intermittent solar and wind generation.
    • Power investment decisions benefit from the generally long lives of mining operations, low-cost land availability, declining cost of solar, availability and increasing size of battery storage capacity.
    • During our recent trips to both Australia and West Africa, we witnessed current or soon to be installed solar power capacity - incentivized by a combination of diesel price volatility and falling cost of alternative energy projects, as well as the low reliability and/or high cost of grid power.
    • We visited a fully operational solar farm at Gold Fields’ Gruyere joint venture. The company appears to be emerging as a leading player in this area, with existing or planned solar and/or wind power generation across its Australian and South African operations.
    • Longer-term full de-carbonization challenges remain, as electrification solutions do not yet exist for large haul trucks and long hauls. In addition, battery storage capacity, both mobile and stationary, is insufficient to operate at the required utilization rates.

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Important Disclosures

* Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): a valuation metric that looks at a company’s debt and cash levels in addition to stock price and relates that value to its profitability.

 Lauren McConnell, “Gold – Comparing Historical EV/EBITDA to 2023/2024 Consensus,” Paradigm Capital. August 30, 2023.

 U.S. Geological Survey, 2022, Mineral Commodity Summary: Gold, https://pubs.usgs.gov/periodicals/mcs2023/mcs2023-gold.pdf (accessed September 2023).

All company, sector, and sub-industry weightings as of August 31, 2023 unless otherwise noted.

Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this communication.

This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results.

Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

1The U.S. Dollar Index (DXY) measures the value of the U.S. dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. 2NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold. 3MVIS 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. 4S&P 500 Index is a float-adjusted, market-cap-weighted index of 500 leading U.S. companies from across all market sectors.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a Fund’s performance. Indices are not securities in which investments can be made.

Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.

NYSE Arca Gold Miners Index is a service mark of ICE Data Indices, LLC or its affiliates (“ICE Data”) and has been licensed for use by Van Eck Associates Corporation (“VanEck”). VanEck products are not sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding VanEck products or the ability of the NYSE Arca Gold Miners Index to track general stock market performance.

ICE DATA MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE NYSE ARCA GOLD MINERS INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL ICE DATA HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH AMAGES.

MVIS Global Junior Gold Miners Index (the “Index”) is the exclusive property of MarketVector Indexes GmbH (a wholly owned subsidiary of Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MarketVector Indexes GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. VanEck products are not sponsored, endorsed, sold or promoted by MarketVector Indexes GmbH and MarketVector Indexes GmbH makes no representation regarding the advisability of investing in VanEck products.

The S&P 500® Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2023 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.

The Gold Strategy is subject to the risks associated with concentrating its assets in the gold industry, which can be significantly affected by international economic, monetary and political developments. The strategy’s overall portfolio may decline in value due to developments specific to the gold industry. The strategy investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability. The strategy is subject to risks associated with investments in Canadian issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, gold-mining industry, derivatives, emerging market securities, foreign currency transactions, foreign securities, other investment companies, management, market, non-diversification, operational, regulatory, small- and medium-capitalization companies and subsidiary risks.

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and this opinion may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

Diversification does not assure a profit or protect against loss.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
666 Third Avenue | New York, NY 10017

Important Disclosures

* Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): a valuation metric that looks at a company’s debt and cash levels in addition to stock price and relates that value to its profitability.

 Lauren McConnell, “Gold – Comparing Historical EV/EBITDA to 2023/2024 Consensus,” Paradigm Capital. August 30, 2023.

 U.S. Geological Survey, 2022, Mineral Commodity Summary: Gold, https://pubs.usgs.gov/periodicals/mcs2023/mcs2023-gold.pdf (accessed September 2023).

All company, sector, and sub-industry weightings as of August 31, 2023 unless otherwise noted.

Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this communication.

This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results.

Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

1The U.S. Dollar Index (DXY) measures the value of the U.S. dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. 2NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold. 3MVIS 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. 4S&P 500 Index is a float-adjusted, market-cap-weighted index of 500 leading U.S. companies from across all market sectors.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a Fund’s performance. Indices are not securities in which investments can be made.

Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.

NYSE Arca Gold Miners Index is a service mark of ICE Data Indices, LLC or its affiliates (“ICE Data”) and has been licensed for use by Van Eck Associates Corporation (“VanEck”). VanEck products are not sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding VanEck products or the ability of the NYSE Arca Gold Miners Index to track general stock market performance.

ICE DATA MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE NYSE ARCA GOLD MINERS INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL ICE DATA HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH AMAGES.

MVIS Global Junior Gold Miners Index (the “Index”) is the exclusive property of MarketVector Indexes GmbH (a wholly owned subsidiary of Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MarketVector Indexes GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. VanEck products are not sponsored, endorsed, sold or promoted by MarketVector Indexes GmbH and MarketVector Indexes GmbH makes no representation regarding the advisability of investing in VanEck products.

The S&P 500® Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2023 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spglobal.com/spdji/en/. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.

The Gold Strategy is subject to the risks associated with concentrating its assets in the gold industry, which can be significantly affected by international economic, monetary and political developments. The strategy’s overall portfolio may decline in value due to developments specific to the gold industry. The strategy investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability. The strategy is subject to risks associated with investments in Canadian issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, gold-mining industry, derivatives, emerging market securities, foreign currency transactions, foreign securities, other investment companies, management, market, non-diversification, operational, regulatory, small- and medium-capitalization companies and subsidiary risks.

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and this opinion may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

Diversification does not assure a profit or protect against loss.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
666 Third Avenue | New York, NY 10017