Proceed with caution when going for gold

With Randgold gone, mid-cap firms remain risky business

THE world’s big gold mining firms have already had a busy year. Things kicked off with a bang when, on 2019’s first day of trading, Barrick Gold completed its £4.6bn takeover of FTSE 100-listed rival Randgold Resources, capping off one of the industry’s biggest ever mergers.

Randgold shares delisted in London on the same day – leaving small British investors without a blue-chip gold miner to buy into and no other clear successor for retail portfolios.

Gold equities, according to Duncan MacInnes of investment manager Ruffer, are ‘ cheap’ and ‘unloved’.

But rising gold prices and better cost controls are making the sector more appealing again.

So in the absence of Randgold from the LSE, where should shareholders turn now?

There is, unfortunately, little solace to be had from higher-profile mid-cap gold miners.

Finncap’s deputy head of corporate finance for mining, Christopher Raggett, said: ‘There is simply no mid-tier producer in whom London investors can confidently put their money.’

Egypt-focused miner Centamin expects gold output to increase by between 4pc and 10pc this year – but its recent track record is far from unblemished.

The company lowered its gold production guidance three times in 2018 and undershot analysts’ forecasts for 2019 output with revised guidance.

And costs are also rising more quickly than analysts had thought as the firm battles operational and geological issues at its Sukari mine in Egypt. Tanzania-focused Acacia Mining (majority- owned by Barrick) has had a torrid time after being slapped with an eye-wateringly large £144bn tax bill by the Tanzanian government in 2017, which has also banned Acacia from exporting gold and even arrested some of the company’s staff.

Peel Hunt analysts believe it is undervalued despite being a risky purchase, giving it an ‘Add’ rating partly on the grounds that it predicts Barrick and the Tanzanian government will come to a resolution this year.

But given Centamin’s operational disappointments and the dispute overhang with Acacia, they believe Latin America-focused Hochschild Mining might be safer in the nearterm. The Barrick- Randgold merger also prompted speculation that some of the mid- market companies would bulk out as the combined company sold smaller assets.

Finncapp’s Raggett believes it is more likely that smaller producers seeking to build scale will be looking for mergers and acquisitions. CHEERLEADERS of West African gold producer Avesoro Resources say it is in prime position to become one of the main beneficiaries of this trend.

Shares in AIM- quoted Avesoro could be about to boom, with the company expected to reveal in the second quarter that the mineral reserves at its Burkina Faso asset are much more extensive than previously thought.

But Avesoro is also not in a rush to pay down debt, with AJ Bell’s investment director Russ Mould saying it remains a ‘highly risky play’.

However, SP Angel’s research director John Meyer is sceptical that this trend will actually play out at all in the near future. ‘Bankers, brokers and advisers love the idea of a wave of acquisitions in the gold sector. The truth is these are rare events,’ he says.

‘The big miners might offer some peripheral mining assets but there are unlikely to be any bargains on offer till the market forces the company to unwind more debt.’

So if the bigger-name, mid-cap miners are generally a risky bunch at present, is this the moment to jump on the small-cap bandwagon and try to suss out the next dynamite exploration company?

Another West Africa-focused gold miner, Hummingbird Resources, and Scotgold, a company developing a gold mine in Scotland, both have their enthusiasts.

But local production disruptions in Mali ward some analysts off Hummingbird and the potential for environmental opposition for Scotgold’s mine – targeted to be built in a national park – also provide a compelling counter-balance.

Investec Global Gold Fund manager George Cheveley warns: ‘Single asset and/ or country risk can undermine investments in small companies even though the management team may be very credible.’

At least for now, it would seem there is no successor to Randgold’s blue- chip throne and an element of calculated risk with all the other firms on offer.

The old adage might be to ‘buy gold’ in times of market turmoil.

The advice with gold companies is probably best described as: proceed with caution.