Investors in Gold Mining Bonds Leave Shareholders in the Dust

Two years of belt-tightening by the world’s biggest gold miners have allowed bondholders to reap greater rewards for less risk, leaving equity investors -- at least comparatively -- in the dust.

The collapse of the commodities super cycle left companies struggling to repair debt-ridden balance sheets. But since 2015, the top three North American gold producers -- Barrick Gold Corp., Newmont Mining Corp. and Goldcorp Inc. -- have all cut debt much more dramatically than companies in the materials sector, where total debt has started to creep higher after falling in the second half of 2016.

One consequence of this is that the longer-term bonds of these senior gold miners are less sensitive to movements in metals prices than are those of the broader materials sector, for both technical and fundamental reasons.

On the technical side, the market for these issues has become increasingly illiquid, as investors tempted to sell got out during recent tenders. That’s left most of the debt in the hands of long-term investors, such as insurance companies, who are more likely to hold fast, according to Zachary Chavis, a portfolio manager at Austin, Texas-based Sage Advisory Services Ltd.

“They kind of trade by appointment,” Chavis said of the gold miners’ bonds. “No dealer is going to short these names.”

Buy, Sell

In contrast, it’s easier to buy and sell the debt of other large materials companies, including copper miners, which in turn makes them more reactive to movements in metals prices, Chavis said. 

“It becomes harder to take a bet just on the gold miners, because it’s hard to buy them,” he said. It’s easier to trade names like BHP Billiton Ltd. or Rio Tinto Group, he said.

Fundamentally, debt reduction has solidified the investment-grade ratings of senior gold miners, making them less reactive to market swings, said Nicholas Leach, a portfolio manager at CIBC Asset Management.

“The balance sheet is so strong that it’s insulating the debt from changes in the business risk, which are driven by changes in commodity prices,” he said. “The performance of their debt securities is more tied to the Treasury market than the commodity prices.”

All three companies have outperformed an index of U.S. Treasuries since 2016.

Share performance has been mixed for the three companies since mid-January last year, with Newmont up and Barrick and Goldcorp down. However, the bonds of all three companies have outperformed their stocks.

Bonds Top Equity

Miner bonds have outperformed company stock and the gold spot price

Source: Bloomberg

Note: Total return from Jan. 19, 2017, to Jan. 11, 2018