Chicago, IL - October 16, 2015 - Today, Zacks Equity Research discusses the Gold (Part 2), including Harmony Gold Mining Company Ltd. ( HMY ), Sibanye Gold Ltd. ( SBGL ), AngloGold Ashanti Ltd. ( AU ), Goldcorp, Inc. ( GG ) and Newmont Mining Corporation ( NEM ).
Industry: Gold (Part 2)
Demand for gold will remain strong in the years to come given the demand for jewelry, bars and coins as well as a safe haven investment. Yet the gold mining industry remains saddled by a number of headwinds. Below, we have discussed some of the key reasons and what investors in the gold mining sector can look forward to in the coming months and years:
Mining Companies Continue to Face Strikes
Gold companies such as Harmony Gold Mining Company Ltd. ( HMY ), Sibanye Gold Ltd. ( SBGL ) and AngloGold Ashanti Ltd. ( AU ), which were already struggling with low bullion process, are facing strikes in South Africa to raise worker wages. The members of AMCU (Association of Mineworkers and Construction Union), the second biggest union for South Africa's gold-mining industry, are prepared to stay on strike to pursue better wages.
Lack of New Projects, Production to Flatten
Annual mine production grew for the sixth straight year in 2014, edging up 2% to a record 3,114.4 tons. Mine production grew 3% year on year to 786.6 tons in the second quarter of 2015. Mines that have been developed and became operational in recent years continue to add to the supply stream. However, the growth in supply from such projects continues to diminish and is likely to flatten in 2015 as the supply pipeline thins.
Some gold companies, including Goldcorp, Inc. ( GG ) and Newmont Mining Corporation ( NEM ), are currently high-grading at certain mines. High-grade portion of a mine is mined first as this increases the grade of the mined ore and lowers cost per unit. However, it has its cons as it depletes reserves very quickly, thus affecting long-term supply.
Gold miners, grappling with far lower gold prices than in previous years and cost pressures, have not been in a position to invest in new projects in recent years. A few companies have slashed capital and exploration spending. Given the lack of new projects, mine production will eventually plateau in the next couple of years.
This is supported by a three-year decline in levels of exploration and development activity in the industry. The Pipeline Activity Index by SNL Metals & Mining, depicts that activity in the gold supply pipeline has been on the downtrend since picking up in the first quarter of 2012. It fell to a new low of below 60 for the first time in the second quarter of 2015.
Substitution with Cheaper Material in the Technology Sector
Demand for gold in technological applications dipped 1% year to date, affected by sluggish economic conditions in key markets and substitution away from gold. Despite inferior durability, copper and palladium-coated copper have made vast inroads into the share of gold in the bonding wire sector, and this trend will continue through the rest of 2015.
Gold also witnessed a decline of 4% in dental demand in the second quarter, the worst performance on record. The decade-long decline in the dental sector shows no sign of abatement as gold continues to lose ground to ceramic alternatives, which have improved steadily in quality, strength and durability.
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