UK gold firms primed for bull-run as coronavirus concerns see precious metal pass $1,600/oz

Tuesday saw gold prices cross the key psychological level of $1,600 an ounce for the first time since 2013 as concerns over the COVID-19 epidemic in China continued to drive investors towards safe-haven assets.

Spot gold hit highs of $1,605.10 an ounce during the day’s trading due to increased risk aversion at the hands of the so-called “coronavirus”.

This followed a warning from the World Health Organisation that confirmed cases of the virus now total 73,332 since first being identified late last year in Wuhan, China. Meanwhile, there has been at least 1,873 deaths from the virus, which is now thought to have spread across as many as 25 countries- including several in Europe.

The rush towards safe-haven assets – which include government bonds and the US dollars as well as gold – stems from concerns over the long-term economic fallout that could arise from the spread of coronavirus. Analysts have suggested that supply chain disruption caused by the virus across numerous industries in China and around the world could hit GDP rates in many leading nations and curtail global consumption.

In response, the likelihood of central banks taking an increasingly dovish stance on monetary policy – cutting interest rates, for example – to stimulate their economy is expected to rise.

While this dynamic can result in falling stock markets and declining bond yields, lower interest rates favour gold as they reduce the opportunity cost of holding non-yielding bullion. As such, concerns around the long-term coronavirus fallout have even enabled the gold price to withstand the impact of a drop in new virus cases over the last two days. Indeed, the precious metal has remained above $1,600 an ounce despite a cautious move forward by equity markets around the world.

Should the current dynamic in the gold market continue, then a very direct beneficiary will be the UK’s junior gold businesses. When the price these firms can command for the precious metal they produce rises, so too does their margins per ounce. The end result is obvious – revenues and profits can soar without any correlation to production rates.

A fantastic example of this dynamic in action can be found in Hochschild Mining’s (LSE:HOC) preliminary 2019 results, which were released on Wednesday.

Precious metal prices recovered significantly throughout the second half of the results period, helping average gold prices for the year as a whole hit $1,414 an ounce- 12% higher than 2018’s $1,268 an ounce average. Average silver prices for the year, meanwhile, reached $16.5 an ounce, compared to $15.3 an ounce in 2018.

Thanks to the higher price it could demand for its gold and silver, the FTSE 250-listed miner noted that it was able to deleverage and: “… generate strong free cash flow allowing us to strengthen our balance sheet, further invest in our exploration initiatives and add value accretive projects to our portfolio.”

Meanwhile, it delivered a 28% year-on-year increase in adjusted EBITDA ($343.3 million), a 100% jump in post-exceptional profit before income tax ($76.8 million), and a 100% leap in post-exceptional basic earnings per share ($0.06). Elsewhere, its cash balance as at 31 December 2019 sat at $166.4 million, compared to $79.7 million.

Critically, however, all of this came despite the firm revealing that year-on-year silver production had fallen by 15% to 16,808,000 ounces, while gold production rose by just 4% to 270,000 ounces.

What Hochschild’s results demonstrate is the real power that metal prices carry over the fates of producing firms in the sector. Despite unremarkable production progress, favourable macro conditions alone enabled the company to deliver transformational year-on-year financial improvements. As at writing, the £902.5 million business is sitting 10% higher at 176.29p – its highest level since the beginning of January.

If global concerns continue to buoy gold prices – be it coronavirus, the US/China trade war, or shifting monetary policy – then we could well see more success stories like Hochschild throughout results season.

Author: Daniel Flynn

The Author does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the piece.

MiningMaven Ltd, the owner of MiningMaven.com, does not a position in the stock(s) and/or financial instrument(s) mentioned in the piece.

MiningMaven Ltd, the owner of MiningMaven.com, has not been paid for the production of this piece by the company or companies mentioned above.

MiningMaven.com and MiningMaven Ltd are not responsible for the article’s content or accuracy and do not share the views of the author. News and research are not recommendations to deal, and investments may fall in value so that you could lose some or all of your investment. Past performance is not an indicator of future performance