• Gold Prices Are Soaring. How Are Gold Companies Reacting?

Gold Prices Are Soaring. How Are Gold Companies Reacting?

22 May 2020

In conversation with Jacque Barradas, Audit Partner, BDO South Africa

Traditionally gold has been a safehaven in times of economic trouble. Given the loss of jobs, and huge contraction in the world economy – where does that leave gold? Still on the rise?

Yes, I think for the short term I definitely see stronger gold price as investors and governments look toward traditional safe-haven investments. You can also see this trend by the increasing yields in the bond market. There are some gold bull analysts that have called the gold price by as much as USD3 000/oz. I am not that bullish but I certainly see a lot more upside to the current price.

In a recent news article, the headline was “Gold, the sleeping giant”. Could you explain what they mean by that?

In my view the article refers to gold that was up to the mid-1980’s a real giant in the investment portfolios that has gone to sleep a bit. Not that many investors have gold in their portfolios anymore, even governments and central banks started diversifying away from gold in the mid-1990 and 2000’s. This giant has only been woken up occasionally in the past 3 decades such as during the odd crises, think 1997, emerging markets and 2007 credit crunch.

From a Gold Miners point a view – are they managing to keep up production during COVID?

The consensus is that the majority of gold miners has continued to produce during the epidemic. Even here in South Africa, that has had some of the strictest lockdowns continued operations in some form or another during the lockdown period. Barrick and Newmont, two of the largest players on the Gold mining scene both posted solid first quarter production numbers. The majority of gold mining happens in developing economies and with the earnings in USD, all gold companies had really good operational results for 2019 and Q1 2020. Good cashflow and deceasing debt bodes well for the entire sector.

How do you envision the supply situation versus demand in the coming 12 months?

The mines have over the years, thanks to great logistical networks been able to move away from large consumable and supply holdings to an almost JiT system. Thus this restriction on movement coupled with the lockdown China, which some mines prepared for as the the Chinese new year slows supply was extended for a longer period due to the lockdowns. The mines will be increasing working capital extensively to “stock-up” post lockdown to ensure they are not caught up in the same scenario.

Where the real challenge is for the mines is in the movement of people. As you know mining doesn’t happen right next to major metropolitan areas. Thus any sort of travel restrictions has an impact not only on supplies but people. Skilled outside contractors and engineers typically only travel to mines occasionally and when needed. Migrant workers like to travel home occasionally, they may have become stuck at home and are unable to return to work.

How are you seeing Gold Miners react to the challenges surrounding the pandemic?

Gold miners have always had to think outside the box. They go an operate in new locations where there previously had been nothing. They set up operations where there is no infrastructure. They need auditors and advisors that can continue to service them either on-site or remotely. We are in process of finishing up an audit now for a Gold Mine nearly 500km from Johannesburg. The audit started the 2nd week of lockdown and we have been able to fully audit this mine without being able to travel to site through the use of technology. This will enable us in future to bring cost of audit down as the need to send huge amount of audit staff to the mines will be cut to only the bear minimum ensuring the safety of the mine staff and audit teams.

BDO recently released a report on the Social Licence to Operate in Mining. Could you comment on how Gold Miners in Africa are transitioning to the growing demands from stakeholders on environment, social and governance transparency?

The successful miners on the continent has always operated with the view that the local communities need to beneficiate from the mining operations. They knew that if they unnecessarily damaged the environment, did not practice good governance and looked after their employee’s wellbeing that their operation would not be successful. Those that take chances eventually gets found out and are dealt with swiftly by communities and governments.

The formalisation of the requirements for environment, social and governance transparency has given the miners a framework with which to operate. A miner is a strange thing, once he/she is aware of what the rules are, can they adopt to ensure that the operation is a success. It is uncertainty that worries miners and that is a major reason why mining in SA has struggled. Uncertainty in policy and demand makes miners unwilling to commit the huge capital required to start new projects.