Photographer: Carla Gottgens/Bloomberg

Bet on Gold-Mining Companies Fuels Jackpot for Soros and Calpers

  • Bullion rally revives profit after slump led to mine cost cuts
  • Industry’s risk-adjusted return tops among 1,645 global shares

Owning shares of major gold producers wasn’t very rewarding over the past five years as the plunging price of the metal hurt profit. But in 2016, the industry has delivered huge returns with relatively little prospect for losses.

While mine operators including Barrick Gold Corp. and Yamana Gold Inc. more than doubled in value this year, gains for the industry came with the least risk among the 1,645 companies tracked by the MSCI World Index, according to data compiled by Bloomberg. By dividing the change in each share price by its volatility, Fresnillo Plc ranked first with investors, generating a 3.2 percent return for each unit of risk, the data show.

Producers got a boost after bullion futures had their best first half of the year in almost four decades. The metal regained its appeal as a store of value amid a slowing global economy, yields below zero on more than $9 trillion in government debt and signs that U.S. borrowing costs will remain low longer than previously forecast. Money has poured in from investors including billionaire George Soros and the California Public Employee Retirement System.

“Gold miners are levered to the gold price because operationally their earnings will improve faster than the gold-price rally,” said Dan Denbow, a portfolio manager at the USAA Precious Metals & Minerals Fund in San Antonio, which oversees $850 million of assets including Fresnillo and Barrick shares. “They’d set up for a lower-price environment, so their margins are expanding greatly with every $1 rise in the gold price.”

QuickTake Gold's Ups and Downs

Bullion has jumped 25 percent on the Comex in New York since the end of December, touching a two-year high of $1,377.50 an ounce last week. That’s delivering bigger profit for mines that have been cutting costs as prices tumbled as much as 46 percent from a record $1,923.70 in September 2011.

Exceeding Targets

Mexico City-based Fresnillo is a big beneficiary, according to Credit Suisse. In a June 30 report, analysts Ivano Westin and Renan Criscio upgraded their rating on the company to outperform from neutral, noting that it has “one of the best balance sheets” and a track record of exceeding production estimates. Fresnillo also mines silver, which has rallied almost twice as much as gold this year. The shares are up 84 percent since May.

Soros Fund Management LLC’s biggest holding by value is Barrick, the world’s largest producer. The Toronto-based mining company has cut costs and sold assets to reduce total debt to about $9 billion at the end of the first quarter from a peak of $15.8 billion in the second quarter of 2013. Those measures, combined with higher gold prices, could set Barrick on course to be debt-free within a decade, President Kelvin Dushnisky said recently.

Barrick’s Total Debt

Hedge funds took notice, piling into Barrick, with Soros buying 19.4 million of its shares in the first quarter, while Duquesne Family Office LLC, run by billionaire Stan Druckenmiller, bought 1.83 million shares, according to their regulatory filings. The company’s shares are up 172 percent this year, after five straight years of losses that wiped almost $41 billion off its market value.

‘Smart Investor’

“Our intention is to continue to make more and more money for Mr. Soros,” Barrick’s Dushnisky told Danielle Bochove in a Bloomberg Television interview July 8. “We think he’s a smart investor. He’s proven once again what a smart investor he is.”

Calpers, the largest public pension fund in the U.S., added 49,700 Newmont Mining Corp. shares, taking its total holdings in the Greenwood Village, Colorado-based company to 1.83 million shares, regulatory filing for the March 31 period show. Newmont, up 130 percent this year, said July 6 that sustained gold prices will boost free cash flow, allowing the company to repay debt ahead of schedule.

The vote last month by the U.K. to exit the European Union also is clouding the global economic outlook, which is helping to sustain the gold rally. Companies including drugstore operator Walgreens Boots Alliance Inc. say there is now increased risk to corporate profits.

That’s not the case for gold producers. They should continue to outperform as the increase in prices drives earnings and free-cash flow higher, allowing companies to increase dividends, Goldman Sachs Group Inc. analysts including Eugene King wrote in a report July 8.

Volatile Shares

This year’s rally hasn’t been without its price swings, which tested the resolve of investors. Gold tumbled 5.7 percent in May, the biggest drop since November. The average volatility for the BI Global Senior Gold Valuation Peers, an index of 14 miners, was 45 this year, compared with about 16 for the MSCI World Index and the S&P 500. Price swings for Barrick were even higher at 58, while Fresnillo’s was 51 and Newmont was 50.

For a discussion of why investors piled into mining stocks, click here.

UBS Group AG says the valuations of many major producers already reflect expectations of further gains in gold prices. The bank downgraded its rating on Fresnillo to sell in a July 7 report.

“Medium-term, I still think there’s a strong rationale to own gold miners,” Daniel Major, a London-based analyst at UBS, said in a telephone interview. The U.K. referendum “has seen over-extended valuations in the market, so I’m wary of chasing certain gold stocks in the short-term due to the magnitude of the recent move,” he said.

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