2023-12-30 04:31:00
Investing in the commodities sector is extremely difficult.
Those who try it encounter two structural problems: the impossibility of predicting the price of the raw material concerned, whose fluctuations often defy logic; and the typically mediocre profitability of mining companies, even when we attempt to smooth it out over a full cycle.
The case of gold producers offers yet another illustrative example of this paradigm. Between 2013 and 2019, a period marked by ultra-accommodating monetary policies, the yellow metal supposed to serve as a safe haven oscillated around a floor price of $1,250 per ounce.
We might fear an interruption of the rally that began in 2019 in response to the policy shift announced by central banks at the end of last year, and the rise in interest rates that followed. This was not the case, and the ounce of gold continued to rise to break the symbolic ceiling of $2,000 per ounce.
As for mining companies listed on the stock exchange, the shares of the two largest producers in the gold sector – the American Newmont and the Canadian Barrick – are trading at prices more or less comparable to their levels thirty years ago. Excluding dividend distributions, three decades lost!
The last decade – marked, as we said, by a dip between 2012 and 2018, then a rally from 2019 – has only been the repetition of an eternal déjà vu: erratic profit capacity, insufficient profitability, absence of continued growth and dilution of shareholders. The results are disastrous at all levels, especially if we compare it to the performance of the SP500.
Between dividends and share buybacks, Newmont returned $9 billion to its shareholders over the 2012-2022 period, and Barrick $6 billion. We will compare this performance to their current market capitalizations of $48 and $42 billion.
Even if it means looking at raw materials, it makes sense here to compare these two major gold producers with an oil producer of equivalent size, for example the Canadian Imperial Oil. Imperial also has a market capitalization of $40 billion and anecdotal debt; it too went through a difficult 2012-2022 cycle, particularly between 2014 and 2021 with the fall in oil prices.
This did not prevent it from returning a total of $19 billion to its shareholders over the period, twice as much as Newmont and three times more than Barrick.
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