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." 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.
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