Investing in the commodity sector is extremely difficult.
Those who try will encounter two structural problems: the impossibility of predicting the price of the relevant raw material, whose fluctuations often defy logic; and typically the average profitability of mining companies, although we try to smooth it out over the cycle.
The case of gold producers offers another illustrative example of this paradigm. Between 2013 and 2019, a period marked by ultra-accommodative monetary policies, the safe-haven yellow metal hovered around a low of $1,250 an ounce.
We could fear an interruption of the rally that began in 2019 in response to the policy change announced by central banks at the end of last year, and the subsequent rise in interest rates. This was not the case and the ounce of gold continued to rise to break the symbolic ceiling of $2,000 per ounce.
When it comes to listed mining companies, the shares of the two largest producers in the gold sector – America’s Newmont and Canada’s Barrick – are trading at prices more or less comparable to their levels thirty years ago. Three decades lost without dividend distribution!
The last decade – marked, as we said, by a slump between 2012 and 2018, then a rally from 2019 – has been nothing but a repeat of the eternal déjà vu: uneven earnings capacity, lack of profitability, absence of continued growth and shareholder dilution. . The results are disastrous on all levels, especially when compared to the performance of the SP500.
Between dividends and share buybacks, Newmont returned $9 billion to its shareholders over the 2012-2022 period, and Barrick $6 billion. We compare this performance to their current market capitalizations of $48 and $42 billion.
While this means looking at raw materials, it makes sense here to compare these two major gold producers to an oil producer of equivalent size, such as Canadian Imperial Oil. Imperial also has a market cap of US$40 billion and unofficial debt; it too went through a tough 2012-2022 cycle, especially between 2014 and 2021 with the drop in oil prices.
That didn’t stop it from returning a total of $19 billion to its shareholders over the period, twice as much as Newmont and three times as much as Barrick.