Gold miners struggle to gain traction
At the start of 2020, the stars seemed to align for Christian Milau, chief executive of Vancouver- based Equinox Gold Corp.
His company’s stock was trading up 58 per cent as high as $ 12.89, a sharp rise in the aftermath of its announcement in December that it would merge with fellow intermediate gold miner Leagold Mining Corp., which rose a similar amount to $4.20.
The nil- premium, merger of equals appeared to be exactly what investors had been clamoring for. Together, the two companies had more assets, and that increased the geographical diversification of their portfolio, which translated into a lower cost of capital, a higher trading multiple and a market capitalization large enough to attract attention from several index funds.
“It really was a case where the sum of the parts are worth more,” said Milau.
But as the fallout from the spread of coronavirus rocks the equity markets, all those benefits appear to have flown out the window. On Thursday, two days after the merger actually closed, both companies were trading at, or at many times, below their pre-merger share prices, with Equinox at $7.92 and Leagold at $ 2.70. Milau said it will take a few more days for the shares to consolidate fully under Equinox.
It’s one example of how narratives around gold are being reset, if only temporarily, by the worst crisis in more than a decade. Bullion, which had been steadily rising since last May, and has long been considered a safe haven asset during moments of panic, tumbled four per cent on Thursday to US$ 1,592. Gold prices are up nearly 4 per cent year-to-date, compared to double- digit declines in equity markets.
On Wednesday night, there were already signs that it would likely be a volatile day in equity markets, after U.S. President Donald Trump declared new restrictions set to last 30 days on air travel to and from Europe. Then, news filtered out that Trump himself had met with dignitaries in Brazil who were exposed to coronavirus; and in Canada, Prime Minister Justin Trudeau announced he would self- isolate while his wife awaits test results for COVID-19.
The drop in gold prices fuelled fears that many investors are desperate to raise cash to cover other losses, and many gold bulls continue to believe it will outperform other asset classes.
In the meantime, despite the fact that oil prices are low, many foreign currencies are trading weakly against the U. S. dollar, and gold still remains up 22 per cent from one year ago — all factors that align in gold miners favour, yet many are still facing the harsh realities that the wider equity markets are ailing from.
Milau tried to put a brave spin on the situation.
“If you would have told me a year ago, that gold prices would be where they are, I would have said it’s party time,” he said. “That kind of price is still fantastic.”
Of course, the current market volatility may have real consequences on what happens in the sector.
For instance, Vancouver-based Pretium Resources Inc., which operates a gold mine in British Columbia, had suggested it would open its data room to potential suitors after it released its new life of mine plan, which happened earlier this month.
But with its stock down 41 per cent since the start of the year at least in part due to earnings miss unrelated to coronavirus, and the company currently seeking a new chief executive, analysts were skeptical that such a situation could lead to any type of transaction.
“Who wants to sell now?” Said Josh Wolfson, director of global mining research at RBC Capital Markets.
“It’s going to be difficult to get any M&A over the line with this much volatility.”
Still, he said that the outlook for gold prices has actually improved since it’s most influenced by global interest rates, and as those continue to decline, the yellow metal should eventually reap the benefits and increase in value.
“I would point to the fact that gold is coming off recent highs,” said Wolfson. “Sure, it’s down four per cent, but overall it’s significantly outperforming broader equities.”