Gold prices soared during the recession, and have started to fall as investors get ready for the beginning of tapering, but both trends have happened almost independently of how gold companies are run. Global gold companies have cumulative impairments of more than $60 billion over the last 13 years, report Citi analysts Johann Steyn and Craig Irwin, and now that macro factors are turning against them more than a decade of weak fundamentals are going to finally make an impact.
The top 10 global gold companies have cumulatively impaired
“We estimate that the top 10 global gold companies have cumulatively impaired ~ $61 billion in operating fixed assets and goodwill since 2000,” write Steyn and Irwin. “This is equal to 51 percent of their current combined market caps.”
The two analysts found that the destruction of economic value, measured as the difference between return on invested income and the cost of capital, was common for large gold companies. Of the ten largest, seven gold companies effectively destroyed value, one broke even, and two made a solid profit over 12 years. BVN led the pack while KGC, ANG and AGX were the worst performing gold companies since 2000.
Most gold companies failed to deliver ROIC’s above WACC
“Investors should be very careful when looking at ROIC’s quoted by gold companies and market participants. This is as the ‘real’ IC part of the equation is substantially higher than what appears on the balance sheet,” write Steyn and Irwin. “Most gold companies failed to deliver ROIC’s above WACC over the past decade, despite a six-fold rise in the gold price. We maintain the industry faces fundamental challenges that will make long-term EVA accretion highly unlikely… we maintain our bearish stance.”
Pouring money into gold could be the wrong strategy
With so much lost value, it’s reasonable to question whether gold should still be the go-to hedge against uncertainty. It certainly is, as can be seen when uncertainty over Syria bolstered prices and the current developing diplomatic resolution allowed them to fall again, but it could be time to look for other assets to use when trying to defend value. Hopefully, tapering will soon start and the economic recovery will continue unabated, so most investors will be looking to do better than play defense, but if there is another shock to the system pouring money into gold could be the wrong strategy.