Image Source: Peter Craven
Structure of the Diversified Mining and Gold Mining Industries
The diversified mining industry is highly cyclical and almost entirely commoditized, with little differentiation from one firm to the next. Rising input costs can only be passed on to consumers if industry-wide prices increase. Exploration and development require large capital investments, which could pressure cash flows during weak economic times. A miner’s position on the cost curve for each respective resource is a critical investment consideration, given the volatility of commodity prices. Though emerging market growth will be a key source of demand for years to come, we don’t like the structure of the group.
Gold miners are tied to the world price of gold, which depends on a number of demand drivers: industrial and jewelry; gold as an investment; central bank activity; inflation expectations; and speculative trading. If realized prices on the yellow metal fall and remain at low levels, mining profitability would be significantly impaired. Industry constituents must constantly seek to replace reserves depleted by production via new exploration, which remains a speculative activity. Unexpected project cost overruns remain another key risk. In general, we’re not huge fans of the volatile fundamentals of the gold mining sector.
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