Gold had a slow start in 2019 as prices remained below $1321, even hitting lows of $1266 in the first quarter of the year. However, as the year came to close, prices surged to 6-year highs in response to mounting U.S-China trade tensions. Geopolitical tension between the U.S and Iran also brought to light Gold’s safe-haven attributes, consequently fuelling further price gains.
A $200 price gain in 2019 might as well have revitalized growth prospects among junior gold companies. The price increase has helped revitalize growth prospects in the gold mining business, with the trend set to continue in 2020. Junior gold companies continue to record cash benefits emanating from the higher gold price. With the new cash comes the unending debate as to how the companies are likely to spend their new fortunes.
While some fund managers with stakes in some of the junior gold companies are increasingly pushing dividend payouts, some are pushing for internal investment. Leadership among the miners, on the other hand, are pushing for new gold supplies to ensure operational sustainability for the years to come.
New gold discoveries have declined significantly over the past decade. While the potential for new discoveries is still there, only companies with the technology as well as financial power stand a chance as gold deposits are now deeper, harder, and expensive to find.
Mergers and acquisitions are thus expected to take center stage in 2020 as some of the miners seek to expand their mining portfolios.
Mergers and Acquisitions
Some of the biggest gold miners are increasingly seeing their gold reserves get depleted. For that reason, most of them have resorted to mergers and acquisitions in a bid to replenish their reserves with already operational projects. Newmont, one of the biggest gold miners, is at risk of seeing its reserves run to zero over the next ten years.
Similarly, the company has merged with Goldcorp, resulting in a $10 billion Newmont Goldcorp company. The combined company wilds the much needed financial muscle and power to invest in expansion as well as exploration projects in a bid to enhance gold reserves.
Endeavour Mining is another company that has inked a $2.5 billion merger deal with Centamin as it looks to strengthen its prospects in the gold mining business. Zijin Mining is set to acquire Continental Golf for $1 billion as Equinox and Leagold push forward with the merger at market value.
Equity Increase
While gold prices appear to have stabilized above the $1500 mark, the equity of gold juniors is yet to tick higher. Major gold producers have seen their equity tick by an average of 24%. In contrast, juniors, as indexed by the Venture Exchange, are down by an average of 10%
The trend should change in 2020 on gold prices stabilizing at current highs. Increased merger and acquisition activity could be the trigger behind increased equity levels among juniors. Likewise, a decline in competition from other emerging industries such as the cannabis and crypto market should see junior gold companies elicit strong institutional investment.
New Entrants into the Canadian Market
Given the high gold prices, a number of new entrants are expected in the Canadian mining industry. The new entrants would mostly come from Australia and China, countries that are increasingly looking for raw materials as well as metals for their industries.
The trend is already gaining traction the likes of Newcrest, St Barbara, Evolution Mining, and Zijin having already made their presence felt as new entrants in the mining industry.
Discoveries Grades and Tonnage Could Decline
The likelihood of new gold projects coming online is minimal. Very few companies are willing to commit capital to new projects as current projects have lower grades and tonnages. The fear of high exploration and extraction costs would likely keep most junior gold companies at bay when it comes to pursuing new projects.
Gold Prices Outlook
While the U.S-China trade deal has brought some level of stability in the markets, thereby cooling tensions, volatility with regards to gold prices is likely to remain high. Brexit tensions and uncertainty, as well as Hong Kong protests, should continue to fuel demand for gold as a safe haven.
The disintegration of the Iran Nuclear deal and soaring tensions with the U.S is the latest geopolitical tension likely to continue fueling demand for gold. With gold prices expected to continue rising, junior gold stocks should continue rising as well, given the expected returns on mining operations.
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