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Investors warn gold miners to keep lid on ambitions

Sun Sep 15 2019


Gold miners are facing pressure from investors to keep their animal spirits in check as the precious metal trades at its highest levels in six years.


As the industry gathers this week for its annual gold conference in Denver, some of the sector’s largest investors have warned gold miners not to repeat the mistakes of the past.


“We don’t want to see the poor decisions that we’ve seen in previous cycles,” said Joe Foster, a fund manager at VanEck in New York. “The emphasis will continue to be on more conservative management styles, in terms of debt and financial management.”


Gold miners have outperformed this year, rallying 31 per cent according to the VanEck Gold Miners Exchange Traded Fund. The gold price has risen 17 per cent to about $1,500 a troy ounce.


But investors are fearful that soaring gold prices will lead to a repeat of the last boom, which peaked in 2011 when they rose above $1,900 a troy ounce. Encouraged by bankers, miners splurged cash on ambitious deals and projects that ultimately destroyed value for investors when gold crashed in 2012.

“The big thing we’d like to see is for companies to grab the margin expansion from higher gold prices and return that to shareholders as dividends,” said Mark Burridge, managing partner and fund manager. “We don’t want to see a massive shift to growth.”


Investors also want gold producers to keep a lid on costs and take a more conservative approach to executive remuneration. Shareholders’ Gold Council, a group backed by 19 investors including New York hedge fund Paulson & Co and Egyptian billionaire Naguib Sawiris, has found gold miners spend much more on salaries and general administrative costs than their peers in copper and iron ore.

If listed gold miners brought their spending in line with the rest of the mining industry, $13bn could be unlocked for shareholders, the group says.


“SGC believes that it is imperative for management teams and boards to immediately explore ways to reduce excessive spending levels,” it said.


That message appears to have been taken on board, at least by the largest companies in the sector. Gary Goldberg, head of Newmont Mining, the world’s biggest gold producer, will not be distracted by the high gold price.


“If I was an investor I’d be making sure people aren’t getting starry eyed with the gold price,” he told the Financial Times. “Making sure they are staying focused on the basics going forward.”


Mr Foster expects that sentiment to be shared by some miners at Denver. “Companies are no longer afraid to say they have a flat production profile,” he said. “If a company can sustain production for the foreseeable future and maybe grow margins by becoming more efficient — you’ll see that type of talk.”


While investors are justifiably wary of deals, many believe there needs to be a round of consolidation among the small and mid-cap producers.


According to bankers these companies should merge to improve returns, but in many cases entrenched senior management — who do not want to give up pay packages that stretch into the millions — are standing in the way.


“There are clearly some companies that should be paying more dividends but in other cases it makes sense for them to consolidate,” said George Cheveley, portfolio manager at Investec Asset Management.