Why are gold prices hitting record highs?

Miners continue to outshine

Gold equities continued to outperform gold bullion in May. The NYSE Arca Gold Miners Index was up 3.48%. In our view, the amplified leverage of miners to the metal reflects: 1) gold stocks playing catch up, coming from oversold levels relative to bullion; and 2) overall strong fundamentals of the sector as evidenced by Q1 2024 financial and operating results, where the number of results that met or outperformed expectations exceeded those that underperformed.

We have brought attention to the importance of companies meeting expectations with respect to their share price performance, and May was a good example of that. All else being equal, a gold price forecast of US$2,300 per ounce for Q2 2024, which is in line with the average spot price for this quarter, should result in higher earnings and cash flow generation for the industry in Q2 compared to Q1, when the spot gold price averaged about US$2,070 per ounce. Another strong earnings season for the sector should support further increases in valuation multiples assigned to gold equities.

In focus: Regional and country-specific risks

We have also highlighted the impact of jurisdiction risk on companies’ valuations. Gold mining companies face many risks related to the regions where they operate. Markets have difficulty differentiating between broader jurisdictional risks and risks to mining operations. Companies operating in a country or region with heightened political instability, for example, will trade at a discount, this is even if their businesses have been operating normally and are unaffected by unrest or risk of turmoil.

Managing country exposure within a portfolio of gold equities is a challenging task. With more than 50 elections taking place around the globe in 2024, this task comes into sharper focus. Elections bring political, social, and economic uncertainty; they can be politically destabilising, lead to social upheaval, or change (for better or worse) the growth outlook of a country or region and, therefore, its general investment appeal. The outcome of an election can trigger responses in the financial markets, as investors attempt to assess the potential ramifications of a new government.

Is Mexico still in its “prime”?

The mining sector was watching the outcome of Mexico’s presidential election in early June. Mexico is the world’s largest producer of silver, accounting for about 25% of global silver production in 2023. The country is also among the top 10 global gold producers, with about 4% of global gold production in 2023. In addition, Mexico produced about 3% and 5% of the world’s copper and zinc, respectively in 2023.¹

Despite many challenges, Mexico, has been ranked among the world’s most prime mining jurisdictions for a long time. However, this “prime” rating came into question when Andres Manuel Lopez Obrador (AMLO) was elected Mexico’s president in 2018. The market’s concerns were justified too. Under AMLO’s administration, no new mining concessions have been granted and a proposal to reform the country’s mining law was approved in 2023.

Some of the most significant changes in the new law include:

• A 30-year limit on mining concessions, compared to a 50-year limit under the old mining law;
• Added grounds for cancelling current mining concessions as well as a more extensive list of requirements to maintain a valid mining concession;
• Creation of additional environmental concessions for mining use. For example, no new concessions will be granted in regions without the availability of water, in natural protected areas or if there is a risk to the general population; and
• Concession allowance on a per-mineral or per-substance basis, compared to previous mining concessions granted for the totality of the underlying resources.

At the end of his six-year presidential term, AMLO also proposed changes to Mexico’s constitution, including two proposals that impact the mining industry. These include a proposal to no longer grant concessions for open-pit mines and to grant water concessions for domestic use only in regions with water scarcity.

Our discussions with the management of several mining companies with operations and/or projects in Mexico have given us reason to be cautiously optimistic, with most companies expecting that a new government would be a welcome change for the mining industry. Mexico has a new president-elect, Claudia Sheinbaum, and we believe it is still too early to determine the impact of this change on the mining sector. Thus, we continue to monitor the political developments in Mexico and look forward to being able to upgrade Mexico in our rankings, making it a prime destination for mining investment once again.

¹U.S. Geological Survey, Mineral Commodity Summaries, January 2024