Gold prices have reached an all-time high, surging to US$2,560 an ounce. This rise has been driven by a combination of European Central Bank (ECB) rate cuts and expectations of a similar move by the US Federal Reserve. As inflation fears subside, gold miners are set for significant cash flows. Large-cap miners like Newmont, Northern Star, and Evolution are well-positioned to benefit, while smaller players show a diverse range of performance.
Gold Price Surge: Key Factors
On Friday, gold prices jumped 1.9%, hitting a record high of US$2,560 per ounce. It marks a 24% increase year-to-date, making it one of the best-performing commodities in 2024. Several key developments contributed to this surge:
The ECB cut interest rates by 25 basis points, marking the second cut in three months.
The ECB’s updated projections indicated weaker growth but persistent inflation. ECB President Christine Lagarde noted the euro-area economy faces headwinds, but growth will improve over time.
US core producer prices rose 0.3% in August, slightly above expectations. However, on an annualised basis, the headline PPI was 1.7%, below the 1.8% consensus.
The chances of a 50 basis point Fed rate cut next week rose to 28%, up from 14% on Thursday, but still below the 50% odds from a month ago.
With rate cuts anticipated in both Europe and the US, the environment for gold remains favourable.
Large-Cap Gold Miners
Gold miners are poised to capitalise on rising prices. Their leverage to higher bullion prices and reduced inflationary pressures are setting them up for significant cash flows.
Newmont (ASX: NEM)
Newmont, the world’s largest gold miner, has seen an upgrade to “Outperform” by CIBC analysts. With divestments of non-tier one assets like Telfer and Havieron, the company is focused on meeting its US$5 billion net debt target. Analysts see these divestments as a catalyst for ongoing deleveraging and further share buybacks.
Newmont’s gearing sits at 11%, with a free cash flow yield of 5%, making it a good option for regular investors seeking exposure to the gold market. The company is forecast to hold US$8.8 billion in debt but is well on track to meet its financial goals.
Northern Star (ASX: NST)
Northern Star, one of Australia’s longest-standing gold miners, reported strong earnings in FY24. Highlights include:
- Revenue up 19% to $4.9 billion
- Underlying EBITDA up 48% to $2.2 billion
- A record FY24 dividend of 40 cents per share
- Cash and bullion holdings of $1.2 billion as of 30 June 2024
Northern Star’s KCGM expansion is positioning the company for further growth. This expansion is expected to make KCGM one of the top five global mines.
Evolution (ASX: EVN)
Evolution also posted impressive FY24 results. Its underlying EBITDA grew 67% to $1.51 billion, and net mine cash flow rose by an astonishing 1,533% to $583.7 million. Evolution’s dividend increased 150%, and the company reduced gearing from 33% to 25%. Further deleveraging is expected in FY25, driven by additional cash generation.
Comparing Large-Cap Metrics
In terms of valuation, Newmont and Evolution both have a price-to-earnings (P/E) ratio of 15.8x, while Northern Star’s P/E is 19.3x. Northern Star also offers the highest dividend yield of 2.9%, compared to Newmont’s 2.0% and Evolution’s 1.7%. However, Newmont leads with a free cash flow yield of 5%.
Smaller Gold Miners: Diverse Performance
Smaller miners have experienced a range of outcomes, driven by growth strategies, capital raisings, and regional risks.
Production Growth
Pantoro and Emerald Resources have been standout performers. Both companies have managed growth effectively, avoiding excessive share dilution. Pantoro has been up 9.5% in the past month, while Emerald Resources has been up 6.9%.
African Miners
Resolute Mining and West African Resources, both operating in Africa, continue to trade at discounts due to regional risks. However, they are poised for significant re-rating as gold prices rise. Resolute is trading at an FY25 EV/EBITDA of just 1.4x, while West African Resources sits at 3.5x. It compares to the 6x multiple of larger ASX-listed gold miners.
Underperformers
De Grey Mining and Bellevue Gold, despite having promising gold assets in Australia, have struggled after large capital raisings. De Grey raised $600 million in May, and Bellevue unexpectedly raised $150 million in July.
Noteworthy Small Caps
Several smaller-cap gold miners have made remarkable discoveries and could see substantial growth.
Spartan Resources (ASX: SPR)
Spartan Resources has soared by more than 1,000% since May 2023. The company discovered a 2.48 million-ounce gold resource at its Never Never Deposit in Western Australia. As exploration continues, Managing Director Simon Lawson expects to establish a mining reserve “well north of seven figures.”
Catalyst Metals (ASX: CYL)
Catalyst Metals is another success story, with plans to double its production over the next three years while reducing costs. In the past year, the company has grown gold production by 46%, increased reserves by 105%, and generated positive cash flows of $54 million.
Conclusion
Gold’s record-breaking performance, driven by central bank rate cuts, has created a favourable environment for both large-cap and smaller gold miners. While large miners like Newmont, Northern Star, and Evolution are positioned for significant cash flows, smaller miners offer diverse opportunities, from exploration success to regional growth. Investors should monitor these developments closely as gold continues to shine in 2024.
