The increasing gold price has caused a sigh of relief in the gold markets, as most mining companies that had almost given up when the gold price continued to trade in the high $1000’s or the low $1100’s are now more confident in the future once again. Understandably so. As the average AISC per produced ounce of gold is still approximately $900/oz, those mining companies would have generated a net operating margin of approximately $200/oz at $1100 gold, but this margin has more than doubled now gold is zeroing in on $1300/oz.
That’s great news for the sector, and this also has interesting implications on the financing front. Whereas companies were scrambling to get their hands on more cash in the past few years as they were totally not prepared for what happened, the total amount of financings in the Canadian gold sector were astonishingly high with approximately C$6B being raised in 2014, which increased to almost C$8B in 2015 as several companies conducted large capital increases to strengthen their balance sheets (read: to survive).
However, the total amount of capital increases has come to a standstill. Almost no cash was raised in January of this year, but then a sudden spike in February, where almost C$2B was raised in the shortest month of the year. That’s surprising as February is traditionally a weak month to re-finance but what’s even more jaw-dropping is the fact February 2016 saw a bigger capital inflow than ANY month in the previous 2+ years.
Source: Royal Bank of Canada
That’s very interesting, but we think we have a good explanation for this; first of all, the gold price started to move up towards the end of January, and it’s very plausible to think several mining companies thought the uptick was just temporary and they took advantage of the renewed interest in the mining sector to lock in some capital commitments. That’s very understandable and it’s just basic prudent management to do so, as a company would obviously want to protect itself against a potential next leg down.
But as the rally in the commodity markets seemed to be sustainable, the financing need continued to decrease as most producing companies were now generating a positive free cash flow allowing them to self-fund their expenditures rather than having to tap the equity markets. As you can see, the total amount of cash raised in the subsequent few months continued to fall to almost nothing, and most capital raises are now being conducted by companies in the exploration stage which simply have no other option but to issue new shares to fund their activities.
The total amount of gold held by the ETF’s continues to increase, and whereas these Funds owned just 47 million ounces of gold in December of last year, the recent buying frenzy has pushed these levels up to in excess of 60 million ounces, and this doesn’t seem to be slowing down just yet.
It doesn’t look like gold will back off anytime soon, and the $1250+ level might be here to stay as the macro-economic uncertainty continues to dominate the news cycle. Donald Trump, Russia, the Brexit, … It doesn’t look like the world problems will go away overnight, and gold remains one of the best insurances you can buy to protect your wealth.
Secular Investor offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies are transformed into the Gold & Silver Report and the Commodity Report.
First published here: http://j.mp/1rvJnO6