Gold is notorious for its safe haven status and hedging characteristics. Could any gold shares in the S&P/ASX 200 Index (ASX: XJO) provide investors with the defensive asset allocation that they need in this uncertain and volatile climate?
Investors may instantaneously associate gold with a hedge against financial market and economic turmoil. However, this can work both ways. A full blown recession can cause a scenario where volatility and margin calls force leveraged investors and institutions to sell to provide liquidity, and central banks curb gold purchases – similar to what happened during the 2008 GFC.
The Gold/Australian dollar performance has been phenomenal in 2020 following the surge in the US dollar, delivering a YTD return of almost 25%, which will likely benefit the margins and profitability of all gold miners.
Here is a review of how the 3 largest ASX 200 gold miners are looking going into higher gold prices.
1. Northern Star Resources Ltd (ASX: NST)
Northern Star has had a focus in the M&A space following the acquisition of the Pogo Mine in 2019 and KCGM this year. The company continues to deliver strong earnings growth through its acquisitions and a higher average realised gold price.
In 1H20, it reported a 31% increase in revenue and 54% increase in net profit, while its average gold price per ounce (A$) increased from $1,700 to $2,046. The acquisitions resulted in a slightly higher all-in sustaining cost (AISC) from $1,295 to $1,454.
The company has acknowledged the impact of COVID-19 and estimates that these disruptions will result in the March quarter production being 10–15% lower than expected. As a result, the company has withdrawn its production and cost guidance and defer the payment of its interim dividend.
Northern Star's acquisitions position the company to benefit more from the soaring gold price compared to low cost producers such as Evolution and Newcrest Mining Ltd (ASX: NCM). However, the uncertainty around its FY20 production and cost guidance might make it worth exploring other producers.
2. Evolution Mining Ltd (ASX: EVN)
Evolution has maintained its FY20 group guidance of 725,000 ounces vs. 753,001 ounces in FY19 at an AISC of $940–$990/oz vs. $924 in FY19. The company has also completed the acquisition of the Canadian 'Red Lake' gold mine and plans to transform it into a cornerstone asset with annual production in excess of 200koz at an ASIC below US$1,000 per ounce.
Despite a relatively flat production guidance, Evolution is looking for some degree of growth through the Red Lake acquisition. While it may not be positioned to grow as much as Northern Star or Saracen, it does possess some of the lowest costs that may further leverage its bottom line.
3. Saracen Mineral Holdings Limited (ASX: SAR)
Saracen's recent trading update cited that the company is "not withdrawing FY20 guidance (+500,000oz) but will continually review this in light of the prevailing circumstances." This compares to an FY19 production of 355,077 oz.
While I believe things are more inclined to get worse before they get better, Saracen is in an excellent position to grow moving forward. Its balance sheet is robust and flexible with cash and bullion of between $325–330 million, up from $239 million at December 2019.
The company also has large ore stockpiles available for milling (more than 1.7Moz attributable) which will help insulate the business should mining be further restricted.
