The US elections and the increasing possibility of a ‘hard’ Brexit in the UK are likely to lead to heightened market volatility in the months ahead. In our view, exposure to a safe haven like gold would be a good diversifier in an investment portfolio. For investors with a more speculative bias, a pure gold mining company like Gold Fields offers a short-term buying opportunity at the current levels.
Gold Fields Limited is a gold mining company – it’s a producer of gold as well a holder of gold reserves. The company is involved in underground and surface gold and copper mining and related activities, including exploration, development, extraction, processing and smelting. It has around eight producing mines located in South Africa, Ghana, Australia and Peru.
Of South Africa’s three major gold miners – the others being AngloGold and Harmony – Gold Fields is best positioned to benefit from high gold prices and pay dividends. It can maintain production of ~2 to 2.5 million ounces of AuEq (gold equivalent) for the next eight to 10 years following countercyclical investments over the last five years. With an all-in sustaining cost of ~US$900/oz by 2023 in real terms, Gold Fields also has the lowest cost assets of the three miners.
Gold Fields is up 93% year to date. Over the past five trading days, the stock is down 10.49% and over the past three months it has dropped by 9.20%. Over the past 14 days the relative strength index (RSI) is at 35.09, which indicates it is oversold. Volatility has dropped over the past few days, with the 30-day volume registering 50.1%. The beta is also on the high side at 1.12.
Table: Peer comparison
Our speculative buy case
Gold is often cited as a hedge in a portfolio, or as good ‘insurance’ when markets get nervous. It’s unusual in that it’s an asset that goes up, or at least holds its value, when bad things happen and most other assets go down.
Gold has always had a reputation as a bit of a ‘fringe’ investment, but it is increasingly looking less so. This could have interesting implications for the gold price.
Bridgewater, the world’s largest hedge fund group, released a short report on gold early last month – it’s bullish. The group points out that we’re in a world where politicians and central bankers are under pressure to print and spend money. When this has happened in the past, such as over the period of World War II and in the 1970s, gold has enjoyed ‘triple-digit’ (percentage) rallies that dwarf its recent run-up.
Bridgewater notes that gold’s lack of yield (it pays no income) is less of a problem ‘when financial assets are offering so little’. You can’t complain about gold paying 0% when a significant proportion of global bonds actually now charge you to own them. The group also points to gold’s use as a hedge against a wide range of risks that are mostly difficult to protect against. If there is rampant deflation, the gold price may fall, but the metal will do better than many other assets simply because, unlike equities or corporate bonds, it ‘is no one else’s liability that could be defaulted on’.
When Gold Fields reported at the end of August, it had more than doubled its interim profit and paid shareholders a dividend equivalent to that of the entire previous year, as new production and a higher gold price offset disruptions to its mines resulting from the COVID-19 pandemic.
Gold Fields reported after-tax profit of US$161 million (R2.77 billion) for the six months to the end of June 2020, compared to US$79 million for the same period a year earlier. It declared an interim dividend of R1.60 a share – the 2019 full-year dividend was also R1.60. Gold Fields also benefited from a higher gold price during the period and expects the record-high dollar price of more than US$2 000/oz in recent weeks to feed into its full-year financials.
With a week to go until the US elections and volatility likely to increase, for investors with a more speculative bias and who would like exposure to the gold price and a geared gold company, we believe Gold Fields offers a short-term buying opportunity at the current levels.
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