Gold Industry Finance & Investment Club Materials Sector Senior Analyst: Cohen Tan Junior Analyst:...
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Transcript of Gold Industry Finance & Investment Club Materials Sector Senior Analyst: Cohen Tan Junior Analyst:...
Gold Industry
Finance & Investment ClubMaterials Sector
Senior Analyst: Cohen TanJunior Analyst: Park Seohyun, Judy Hsu, Jiang Min Liang, Brian Lee, Zhenghong QiuFall 2014
Industry Definition
Operators in this industry mine gold and silver bearing ores. Mining activities include the development of mine sites and the on-site processing of ore into a concentrate or bullion.
Barrick Gold Corporation(NYSE: ABX)
(NYSE: GG)Goldcorp
(NYSE: NEM)Newmont Mining Corporation
(NYSE: AUY)Yamana Gold Inc.(NYSE: KGC)
Kinross Gold Corporation
Source: IBISWorld, Investext Plus
(NYSE: AU)AngloGold Ashantii Ltd.
Revenue GenerationLocate Mine
• Highly Trained Geologists, Geophysicists and Engineers will Explore for Potential Mine• Two Types of Exploration: Green Field & Brown Field• Brown Field are areas where deposits were previously discovered (Less Risky)• Green Field exploration refers to uncharted territory, where minerals are not known to exist there (Riskier)
Getting Permit
• Set up Water Security• Established Required Labor Force• Gained Community Procurement• Securing Royalties
Mining
• Surface Mining• Underground Mining
Processing
Source: Company 10-k
Supply Chain
Key Selling Industries-Industrial Machinery & Equipment Wholesaling in the US-Chemical Wholesaling in the US-Gasoline & Petroleum Wholesaling in the US-Inorganic Chemical Manufacturing in the US
Key Buying Industries-Jewelry Manufacturing in the US-Finance and Insurance in the US-Industrial Uses of Gold and Sliver in the US
Source: IBIS World
Industry Summary
Gold End Use
JeweleryBar Hoarding Implied InvestmentOfficial Coins & MedalsElectronicDental
69
9
6
5
33 3 2
Market Share
OthersBarrick GoldNewmont MineAnglo GoldGold FieldKinrossNewcrest MingGold Corp
Uses of Gold % of Total
Jewelry 45%
Bar Hoarding 26%
Implied Investment 14%
Official Coins & Medals
8%
Market Share % of Total
Others 69%
Barrick Gold 8%
Newmont Mine 6%
Anglo Gold 5%
Source: IBIS World, Goldman Sach Gold Industry Report
Porter’s Five Forces
SUPPLIERSINDUSTRY RIVALRY CUSTOMERS
NEW ENTRANTS
Threats of Substitutes
Entry Barriers
Exit Barriers
Forward Integration Backward Integration
Low
HIGH
•High Start up cost. The Capex needed to start mining is extremely high
-Branded products do not have any impact on client’s requirement-Highly differentiated products
• Large client lists, clients dependent on software tech support• No formal entry barriers
Medium
LOW
High
•One Product
• High level of competition when securing a mine
• Investors buying gold can switch to other investments such as bonds and equity
• Gold is an essential bill of material for jewelry makers
• Strict Government Regulation – Permission needed to obtain water rights
• Securing of Mine – Difficulty to establish favorable royalties terms or to own a mine
Source: IBISWorld, Company’s 10-k
Trend 1 – Decrease in Gross Margin
Decrease in Gross Margin
Stronger US Dollar
Increase in M&A
Activities
Decrease in Gross Margin
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13
Q1 14
Q2 14
Q3 14
500700900
11001300150017001900
Average Gold Price and Gross Margin Per Ounce Over Time
Average Gold Price Gross Margin Per Ounce
-Price of Gold has decreased about 40% since 2012
-Gold Mining Companies are not able to reduce their All In Sustainable Cost in order to maintain their Gross Margin %
-Gross Margin dropped from 60% to 44.6%
-Companies cut down on their exploration expenses as well as operations in mines that are not productive
-Companies that are successful in reducing their AISCs are companies that are able to beat expected performance
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13
Q1 14
Q2 14
Q3 14
0.30.35
0.40.45
0.50.55
0.60.65
Gross Margin %
Gross Margin %
Source: Goldman Sach Gold Industry Report
Decrease in Gross Margin
Source: TD securities, Dever Gold, Ame Group
AISC Definition = Total Costs + Sustaining Capital + Corporate, Generaland Administrative expense + Exploration expense
Trend 2 – Stronger US Dollar
Decrease in Gross Margin
Stronger US Dollar
Increase in M&A
Activities
Stronger US-Dollar Results in Weaker Gold Price
11/13/2
009
1/22/2
010
4/2/2
010
6/11/2
010
8/20/2
010
10/29/2
010
1/7/2
011
3/18/2
011
5/27/2
011
8/5/2
011
10/14/2
011
12/23/2
011
3/2/2
012
5/11/2
012
7/20/2
012
9/28/2
012
12/7/2
012
2/15/2
013
4/26/2
013
7/5/2
013
9/13/2
013
11/22/2
013
1/31/2
014
4/11/2
014
6/20/2
014
8/29/2
014
11/7/2
014800
1000
1200
1400
1600
1800
800
850
900
950
1000
1050
1100
1150
R² = 0.0122377547859211
Price of Gold & Price of USD Over 5 Years
Price of Gold Power (Price of Gold) Price of US Dollar
-Gold is primarily used as an inflation hedge and safe haven investment
-Recent positive outlook of the US economy has made investors adjust their portfolios, investing more in equities as they have a higher expected rate of return.
-In addition, the US dollar has been growing stronger against a basket of 20 currencies largely because Japanese yen fell to a seven-year low against the US dollar
-Therefore reducing the demand in Gold and thus driving the price of gold down.
Source: Bloomberg, Wallstreet Journal
Stronger US-Dollar Results in Weaker Gold Price
Company Share Price Base Case NAVPS ($1250/oz)
LT Gold Price % From Base Case
$1150/oz NAVPS
$1350/oz NAVPS
$1150/oz NAV
$1350/oz NAV
Barrick Gold $12.46 $10.12 $7.02 $13.46 -30.6% 33.0%GoldCorp $20.09 $16.15 $13.06 $19.24 -19.1% 19.1%Newmont $19.11 $17.72 $11.32 $24.34 -36.1% 34.4%Kinross Gold
$2.74 $3.62 $2.38 $4.92 -34.3% 35.9%
Avg: Large Cap -30% 30.6%New Gold $4.16 $5.48 $4.82 $6.13 -12% 11.9%Detour Gold C$9.25 C$16.05 C$12.24 C$19.87 -23.7% 23.8%Centerra Gold
C$5.67 C$11.44 C$9.30 C$13.59 -18.7% 18.7%
SEMAFA C$3.56 C$3.05 C$2.54 C$3.56 -16.7% 16.7%Avg: Intermediate / Junior 17.8% 17.8%
-A Change in $100/oz in Gold can lead to a significant effect on the stock prices of these Gold Mining Companies
Source: TD securities
Trend 3 – Increase in M&A Activities
Decrease in Gross Margin
Increase in M&A Activities
Increase in M&A Activities
Increase in M&A Activities -Price weakness in Commodities continues to put pressure on Mining Industry
-M&A activities driven more by distress and opportunism rather than out and out growth seeking
-Junior miners are merging with each other recognizing that there are enormous cost savings both administrative level as well as project level
- Yamana and Agnico Eagle paid US$3.49 billion for Osisko's US$28.46 billion of gold in reserves and resources in April 2014
-Lead to possible increase in productivity and decrease in AISC
Source: EY Gold Industry Report, Credit Suisse Report
Risks and Sensitivities
Risk of the Commodity Price Fluctuation
Fluctuation in the price of gold will impact the companies’ earningsFluctuation in the price of commodity such as crude oil will impact the companies’ COGS
Risk of Operation of Mine
The operation of mines and mills is complex and is exposed to a number of risk, most of which are beyond the company’s control. Includes environmental compliance issues; personal accidents; unexpected rock formations; rock bursts
Risk of Change in Environmental Regulations
Gold Mining industry operations have extensive environmental legislation wherein a breach could result in a fines and/or penalties. Environmental legislation is evolving in a manner that means standards are stricter, and enforcement, fines and penalties for noncompliance are more stringent.
Risk of Exploration/Development Investment
Investing in early-stage exploration/development companies involves a high degree of risk and is only recommended for more risk adverse investors. In most discoveries, economic mineralization is not present in sufficient quantity to justify building a mine and recovering the investment
There are Four Main Risks to Gold Industry:
Sources: Company 10-Ks
Key Financial Ratios Company Current Market Price
% Chg from 52W High
Market Cap(US$mm)
Total Debt (US$mm)
Cash (US$mm)
EV (US$mm)
Production (000oz)2014E
AISC (US$/oz)2014E
EV/EBITDA
ABX $11.89 55.43% 14,510 13,094 2,705 24,899 6,268 $1,081 6.8
GG $19.64 66.24% 16,333 3,022 376 18,979 2,819 $937 10.0
NEM $18.40 67.15% 9,555 6,773 1,778 14,550 4,716 $1077 7.4
KGC $2.80 51.47% 3,154 2,057 836 4,375 2,695 $1032 3.6
AUY $3.78 35.26% 3,475 2,043 169 5,349 1,397 $1091 9.3
High $19.64 67.15% 16,333 13,094 2,705 24,899 6,268 1,091 10
Low $2.8 35.26% 3,154 2,043 169 4375 1397 937 3.6
Median $11.89 55.43% 9,555 3,022 836 14,550 2819 1077 7.4
Mean $11.30 55.11% 9,405.4 5,397.8 1,172.8 13,630.4 3579 1043.6 7.42
Source: Yahoo Finance, TD securities, Thomson One
Industry Rating Gold Industry Rating:
Neutral1. Industry Recap
• Companies are trying to keep their AISC to below $1000/oz in order to stay profitable and competitive
• Investment demand remains the key driver• Fear around inflation and deflation as well as geopolitical uncertainty are key price
drivers
2. Industry Outlook • Many Companies appear on track to meet full-year guidance though several require
notable improvements in 4Q14 to meet their numbers• More M&A activities to take place as companies with greater cash and stronger balance
sheet will take advantage of struggling companies.• World gold demand might increase due to current low gold price attracting strong
jewellery demand and bar hoarding
3. Continued Risk Factors• Low Gold Price likely to prompt further asset write-downs and reserve declines in the
next year• US economy seems to be recovering and restoring faith in investors. Investors
continues to divest from gold and invest in equitiesSource: Credit Suisse, TD securities, Goldman Sach Gold Industry Report