In an environment of political, economic and market turmoil, the gold price is within touching distance of record highs and US precious metals miner Newmont (NEM:NYSE) recently sealed a blockbuster $19 billion takeover of Australian rival Newcrest Mining (NCM:ASX), bringing extra pizzazz to the sector.

Gold and its miners are clearly in the spotlight and encouragingly for investors who fear they may have missed the boat, valuations among small and medium-sized gold mining stocks have not kept pace with the surging price of the metal.

A lot of demand for gold has come from central banks rather than institutional and retail investors. If that changes and money piles into funds that track the price of metal then this could act as a strong catalyst for gold mining stocks.

When is gold in demand?

Gold, which has limited applications in industry, tends to be in demand during periods of economic or geopolitical strife, when inflation threatens paper currencies or there are significant falls in bond and equity markets.

Its status as a ‘safe haven’ asset is based on its historic role as a store of value and the fact that, unlike currencies, its value cannot be manipulated through adjustments to interest rates.

THE SHORT AND MEDIUM-TERM DRIVERS FOR GOLD

A key driver for gold in the short term has been talks over the US debt ceiling. Gold has retreated a little from the $2,000 mark as investors have become slightly more hopeful about a resolution to this crisis which doesn’t involve the US defaulting on its debt.

If a deal is brokered then a pullback in gold prices is possible in the short-term, but in the medium-term, as interest rates peak, economies potentially head into recession and the dollar weakens (the US currency tends to have an inverse relationship with gold) then gold prices could shine.

Segun Lawson, the CEO of Thor Explorations (THX:AIM), which recently completed its first full year of production from its Segilola mine in Nigeria, tells Shares, ‘I’m always bullish on gold.’

He adds: ‘When it comes to the gold price, the global inflationary environment we are in and a slowing down of interest rate hikes means somewhere around the $2,000 mark will hopefully persist through this year.’

Offering a more dispassionate view, Robert Crayfourd manages CQS Natural Resources Growth & Income (CYN), an investment trust which invests across the mining and oil and gas space. He explains the trust’s exposure to gold miners has been steadily increasing and recently reached the 20% mark.

Co-manager Keith Watson observes the maximum level the fund has reached on gold historically is in the mid-20s around Brexit and the election of Donald Trump as US president and in the early stages of Covid. ‘In a world of uncertainty people are looking for protection and gold miners have lagged the move in gold by 20% to 30%,’ Crayfourd says.

‘That’s partly justified by cost inflation but we are starting to see those pressures ease. Some small and medium-sized gold miners are trading below one times net asset value and this could be an attractive entry point.’

Watson adds that, against the current backdrop and amid high levels of global indebtedness, it ‘is wise for people to protect their wealth with unencumbered real assets’.

HOW TO INVEST IN GOLD AND GOLD MINERS
VIA FUNDS

Investors are for spoilt for choice when it comes to investing in gold. If you want direct exposure to the precious metal without owning a coin or bar, you are well served by tracker funds.

Alternatively, investing in gold miners involves operational risk but allows you to potentially secure income from dividends and enjoy gains over and above the change in the gold price if they manage to grow their operations.

Investing in a diversified fund of gold producers provides protection from companies’ individual failures. For example, iShares Gold Producers ETF (SPGP) tracks the performance of a basket of gold miners.

This exchange-traded fund has an ongoing charge of 0.55% and has delivered a five-year annualised total return of 11.8%. This compares with 9.3% from BlackRock Gold & General (B5ZNJ89), an actively managed gold mining fund whose ongoing charges are 1.16%.

CQS Natural Resources Growth & Income has stakes in various gold stocks including Newmont, Newcrest, Barrick Gold (GOLD:NYSE) and royalties group Franco Nevada (FNV:NYSE).

INVESTING IN INDIVIDUAL GOLD MINERS

If you want to go a step further and invest in individual gold miners there is a reasonable universe of UK-listed stocks. Though the universe is shrinking as Petropavlovsk went into administration last year, Polymetal (POLY) has warned it is planning to delist from the London Stock Exchange, and Pure Gold Mining left the UK stock market earlier this year.

The table shows how UK-listed gold miners worth more than £100 million have performed since the start of 2023 and, where applicable, over the last five years on an annualised basis. Depressed valuations and a strong gold price could act as drivers for M&A activity, though the UK market is a little short of gold miners of scale compared to stock markets in Canada and Australia.

Among the names generating revenue from more than one asset, Resolute Mining (RSG) has been the best performer this year on the stock market, with a 106% total return. The Africa-focused company has two producing gold mines and impressed the market with its first quarter report in April, beating estimates for production. Stronger output has helped it to pay off a good chunk of debt, while exploration results have also beaten expectations.

FTSE 100 constituent Endeavour Mining (EDV) is a West African producer with six gold mines and all-in sustaining costs of mining at the low end of its peer group. It has seven development projects and more than 100 exploration properties.

Elsewhere, the world’s leading silver producer Fresnillo (FRES) is also one of Mexico’s largest gold producers.

An alternative way to get exposure to gold is through Wheaton Precious Metals (WPM) which is a royalties company rather than a miner. When a miner needs cash to develop a project to the point of production, they often strike a deal with a royalties company whereby the latter provides upfront cash in exchange for a percentage of revenue from future production.

Wheaton tends to secure a cut of precious metal production in projects where it is a by-product to another metal such as copper. This allows it to secure this production at a discount to spot prices.

What is the AISC?

The AISC or all-in sustaining cost is a key metric which shows the direct and recurring costs to mine a unit of ore or in other words, the total costs of sustaining operations. It is expressed in terms of dollar per ounce of gold sold. According to data from the World Gold Council the average AISC for the industry reached a record high of $1,276 per ounce in 2022.

THREE STOCKS TO BUY

Centamin (CEY) 105.5p

Despite a somewhat patchy track record over the past five years or so, Egyptian gold producer Centamin (CEY) has three key projects in chain which could act as a catalyst for the share price and help diversify the company from its current single-asset, single-country focus.

The company has a plan to boost production at its core Sukari mine back above 500,000 ounces per year by developing the mine further underground. It is progressing the Doropo project in Cote d’Ivoire with a pre-feasibility study, a key development milestone, expected in June and it is pursuing an exploration programme in Egypt’s eastern desert.

It trades on a price to net asset value of 0.9 times and offers a prospective free cash flow yield for 2024 of 8.5%. Those are very attractive metrics from an investment perspective.

Endeavour Mining (EDV) £20.34 

This is the stock to own if you are looking for a multi-asset gold company listed in the UK with scale. The company is benefiting from rising production and falling costs.

It has operating mines in various parts of West Africa including Cote d’Ivoire, Senegal, Mali and Burkina Faso. The business is highly profitable and shareholders are being rewarded with a dividend yield in the region of 3%.

Diverse sources of income from its growing portfolio of mines are attractive, albeit you will have to pay a small premium price for the shares. They trade on approximately 1.4 times net asset value. 

Thor Explorations (THX:AIM) 18.5p 

A higher risk but potentially higher reward option for investors is Thor Explorations (THX:AIM). The company entered commercial production at its Segolia mine in Nigeria in 2022. The company is targeting production of 80,000 to 100,000 ounces a year over the next four years at a low all-in sustaining cost of $800 per ounce.

The company has aggressive drilling plans as it looks to extend the four-year mine life of Segolia and capitalise on other opportunities.

Canaccord Genuity analyst Alex Bedwany comments: ‘Thor remains our preferred gold producer in London, with strong margins on offer in the current high gold price environment.’ He forecasts free cash flow in 2023 and 2024 combined of $112 million – around three quarters of the current market valuation.

Risks to consider

Gold is often located in countries with geopolitical or security risks and investors also must consider the dangers of resource nationalism – a country increasing its percentage stake, income stream or control of natural resource projects through higher taxes or directly appropriating assets.

Ratings agency Fitch recently warned of heightened resource nationalism risks in key gold mining jurisdiction Ghana as the government wrestles with a debt crisis.

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