Sent: 13-11-2012 11:56:02
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Gold Miners Need Revived Value Proposition to Compete for Investors
The gold mining industry appears to have shot itself in the foot by aggressively promoting gold bullion as an investment. Exchange traded products linked to gold bullion have gained popularity at the expense of equity investments. The industry now needs a revived value proposition to restore its investment attraction.
Mark Cutifani, the Australian-born head of the Anglogold Ashanti international gold miner, lamented recently on ABC Television (The Business, 31 October) that his share price was not reflecting the upward move in gold prices.
The Anglogold Ashanti share price has made no net gain since late 2008 and is trading at similar levels to those in December 2001. The price more than doubled over the five years to 2006 but failed to hold the gains. As Cutifani's share price was halving, the gold price itself was nearly tripling.
A loss of leverage to higher gold prices has been most noticeable across the sector since 2008. The Australian gold stock price index, for example, has declined 8.4% while the bullion price rose 105%.
As usual, there was a wide disparity in returns within the Australian index. Of the stocks currently making up the index, 27 out of 44 did better than the index itself but only two would have outdone the gold price.
While there is nothing surprising in seeing a large disparity in sector returns, the differences serve to highlight that something more than the gold price, or the recent state of equity markets, is at work.
In recent years, many of the larger gold companies whose share prices dominate the direction of market indices have been suffering from the inevitable affliction of the largest producers in the industry: having to mine depleting resources, they face rising costs and demands for new capital that imply falling fundamental value. Production disappointments and earnings misses have also retarded performance.
The primary reason Cutifani gave for his share price underperforming the gold bullion price had nothing to do with operational outcomes. He believed the emergence of exchange traded funds was the culprit.
The 43 million ozs of gold currently in the world's largest gold related exchange traded product, the SPDR Gold Trust, was valued at US$75.4 billion at the end of September. In 2004, the SPDR Gold Trust was formed with under 300,000 ozs of the precious metal in its London vaults. According to research from BlackRock, there were 107 exchange traded products worldwide offering gold exposure at the end of September with a value of $143 billion.
ETFs have been a phenomenon of the last six years as they roared into prominence as a more efficient way for investors to manage their portfolios and add gold exposure without having to incur equity market or counterparty risks.
The irony here is that the sponsor of the trust setting up the world's leading gold exchange traded product and the instigator of the rush into this form of investment is wholly owned by the World Gold Council (WGC). The WGC, in turn, is an arm of the global gold mining industry. Twenty three of the larger companies fund the council through a production levy.
The council maintains a professional staff in nine cities around the world to persuade central banks, investors and fabricators to keep buying the metal. The council also keeps up a flow of statistics to show how widely gold is being used as a store of value.
Such activities might have seemed a good idea to the miners when gold was battling to reassert its presence after its price was de-regulated. Fears that central banks would quit their holdings added urgency to the lobbying efforts of the industry.
Now, the industry is being run over by its own creation. The activities of the WGC are no longer helping to promote investment in gold miners. The organisation is working against the best interests of the miners who should be closing it down.
Such an apparently dramatic move would have little effect on the standing of gold as an investment medium among portfolio managers or central banks. The investment case has now been widely accepted.
Abandonment of the council could save the industry hundreds of millions of dollars in future counterproductive spending. Carrying on as it is, the industry risks spending money to persuade investors of the merits of investing in gold while, at the same time, convincing them that the equities of gold miners are an outmoded approach.
The gold miners need to put forward a value proposition that no longer relies solely on the investment attractiveness of gold. The miners now need to show how they can offer something more.
Cutifani seems to agree. He said "we've got to do a much better job at delivering value and being seen to deliver value". A first step will be for the miners to work out in their own minds if they have a value proposition beyond simply supplying the ongoing needs of the ETFs.
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