Shareholder pressure succeeds in improving returns from gold miners, says BlackRock

Speaking on the 25th anniversary of the launch of the BlackRock Gold & General fund, Evy Hambro, CIO of the Natural Resources Team at the manager, said that a new era beckons for equity investors in gold mining companies, which have started to focus on profitability rather than size.

Through the past decade of ever rising gold prices, gold mining companies thought that in order to benefit they needed scale of production. However, this came at a price for investors, because the focus on producing more ounces of gold resulted in many companies digging out ever increasing amounts of lower grade ore.

This resulted in costs rising faster than the price of gold and lower profitability. The effect was exacerbated by high levels of M&A activity and reinvestment in lower quality mines.

The industry has subsequently faced pressure behind the scenes from investors such as BlackRock in order to effect change that could benefit shareholders, Hambro suggested.

This type of pressure seems to have paid off, with many top executives of major gold producers changed over the past year, and new management brought in. It is hoped the industry has listened to investors such as BlackRock, and are now focused on increasing shareholder value through reinvesting, rather than just trying to grow at any cost.

“For the major gold mining companies, recognising that big is not necessarily beautiful is important,” Hambro commented in a note.

“Shareholder value may be created by breaking up into smaller, more manageable companies. In addition, management teams must realise that investors need to be rewarded for taking the risk of owning a share in a gold mining company rather than the ETF, and therefore must differentiate themselves through returning capital to shareholders through dividends and, if their own share price has a greater return potential than new projects, through share buybacks.”

Gold has been a volatile asset, Hambro admitted, but since the founding of the fund a quarter of a century ago, the price has risen some $1,000 per oz, even at a level of $1,450 – which is still well below the peak of $1,900 seen in August 2011.

Relative to other assets, the value of gold has remained steady over the past 25 years, according to figures provided by BlackRock comparing the amount of goods or services that a British Sovereign gold coin could buy.

In 1988, when the fund launched, a pint of beer costs 0.018 Sovereigns. In 2013 it was 0.015.

A gallon of petrol cost respectively 0.028 and 0.030.

Versus residential property the value of gold has increased: then the average UK house cost 1,019.5 Sovereigns to purchase, versus 730.9 in 2013.

Separately, Hambro noted that the gold market is for the first time dealing with a situation in which a single country – China – simultaneously is the world’s biggest producer, consumer and importer of gold.


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