Gold Industry

Finance & Investment ClubMaterials Sector

Senior Analyst: Cohen TanJunior Analyst: Park Seohyun, Judy Hsu, Jiang Min Liang, Brian Lee, Zhenghong QiuFall 2014

Industry Definition

Operators in this industry mine gold and silver bearing ores. Mining activities include the development of mine sites and the on-site processing of ore into a concentrate or bullion.

Barrick Gold Corporation(NYSE: ABX)

(NYSE: GG)Goldcorp

(NYSE: NEM)Newmont Mining Corporation

(NYSE: AUY)Yamana Gold Inc.(NYSE: KGC)

Kinross Gold Corporation

Source: IBISWorld, Investext Plus

(NYSE: AU)AngloGold Ashantii Ltd.

Revenue GenerationLocate Mine

• Highly Trained Geologists, Geophysicists and Engineers will Explore for Potential Mine• Two Types of Exploration: Green Field & Brown Field• Brown Field are areas where deposits were previously discovered (Less Risky)• Green Field exploration refers to uncharted territory, where minerals are not known to exist there (Riskier)

Getting Permit

• Set up Water Security• Established Required Labor Force• Gained Community Procurement• Securing Royalties

Mining

• Surface Mining• Underground Mining

Processing

Source: Company 10-k

Supply Chain

Key Selling Industries-Industrial Machinery & Equipment Wholesaling in the US-Chemical Wholesaling in the US-Gasoline & Petroleum Wholesaling in the US-Inorganic Chemical Manufacturing in the US

Key Buying Industries-Jewelry Manufacturing in the US-Finance and Insurance in the US-Industrial Uses of Gold and Sliver in the US

Source: IBIS World

Industry Summary

Gold End Use

JeweleryBar Hoarding Implied InvestmentOfficial Coins & MedalsElectronicDental

69

9

6

5

33 3 2

Market Share

OthersBarrick GoldNewmont MineAnglo GoldGold FieldKinrossNewcrest MingGold Corp

Uses of Gold % of Total

Jewelry 45%

Bar Hoarding 26%

Implied Investment 14%

Official Coins & Medals

8%

Market Share % of Total

Others 69%

Barrick Gold 8%

Newmont Mine 6%

Anglo Gold 5%

Source: IBIS World, Goldman Sach Gold Industry Report

Porter’s Five Forces

SUPPLIERSINDUSTRY RIVALRY CUSTOMERS

NEW ENTRANTS

Threats of Substitutes

Entry Barriers

Exit Barriers

Forward Integration Backward Integration

Low

HIGH

•High Start up cost. The Capex needed to start mining is extremely high

-Branded products do not have any impact on client’s requirement-Highly differentiated products

• Large client lists, clients dependent on software tech support• No formal entry barriers

Medium

LOW

High

•One Product

• High level of competition when securing a mine

• Investors buying gold can switch to other investments such as bonds and equity

• Gold is an essential bill of material for jewelry makers

• Strict Government Regulation – Permission needed to obtain water rights

• Securing of Mine – Difficulty to establish favorable royalties terms or to own a mine

Source: IBISWorld, Company’s 10-k

Trend 1 – Decrease in Gross Margin

Decrease in Gross Margin

Stronger US Dollar

Increase in M&A

Activities

Decrease in Gross Margin

Q1 12

Q2 12

Q3 12

Q4 12

Q1 13

Q2 13

Q3 13

Q4 13

Q1 14

Q2 14

Q3 14

500700900

11001300150017001900

Average Gold Price and Gross Margin Per Ounce Over Time

Average Gold Price Gross Margin Per Ounce

-Price of Gold has decreased about 40% since 2012

-Gold Mining Companies are not able to reduce their All In Sustainable Cost in order to maintain their Gross Margin %

-Gross Margin dropped from 60% to 44.6%

-Companies cut down on their exploration expenses as well as operations in mines that are not productive

-Companies that are successful in reducing their AISCs are companies that are able to beat expected performance

Q1 12

Q2 12

Q3 12

Q4 12

Q1 13

Q2 13

Q3 13

Q4 13

Q1 14

Q2 14

Q3 14

0.30.35

0.40.45

0.50.55

0.60.65

Gross Margin %

Gross Margin %

Source: Goldman Sach Gold Industry Report

Decrease in Gross Margin

Source: TD securities, Dever Gold, Ame Group

AISC Definition = Total Costs + Sustaining Capital + Corporate, Generaland Administrative expense + Exploration expense

Trend 2 – Stronger US Dollar

Decrease in Gross Margin

Stronger US Dollar

Increase in M&A

Activities

Stronger US-Dollar Results in Weaker Gold Price

11/13/2

009

1/22/2

010

4/2/2

010

6/11/2

010

8/20/2

010

10/29/2

010

1/7/2

011

3/18/2

011

5/27/2

011

8/5/2

011

10/14/2

011

12/23/2

011

3/2/2

012

5/11/2

012

7/20/2

012

9/28/2

012

12/7/2

012

2/15/2

013

4/26/2

013

7/5/2

013

9/13/2

013

11/22/2

013

1/31/2

014

4/11/2

014

6/20/2

014

8/29/2

014

11/7/2

014800

1000

1200

1400

1600

1800

800

850

900

950

1000

1050

1100

1150

R² = 0.0122377547859211

Price of Gold & Price of USD Over 5 Years

Price of Gold Power (Price of Gold) Price of US Dollar

-Gold is primarily used as an inflation hedge and safe haven investment

-Recent positive outlook of the US economy has made investors adjust their portfolios, investing more in equities as they have a higher expected rate of return.

-In addition, the US dollar has been growing stronger against a basket of 20 currencies largely because Japanese yen fell to a seven-year low against the US dollar

-Therefore reducing the demand in Gold and thus driving the price of gold down.

Source: Bloomberg, Wallstreet Journal

Stronger US-Dollar Results in Weaker Gold Price

Company Share Price Base Case NAVPS ($1250/oz)

LT Gold Price % From Base Case

$1150/oz NAVPS

$1350/oz NAVPS

$1150/oz NAV

$1350/oz NAV

Barrick Gold $12.46 $10.12 $7.02 $13.46 -30.6% 33.0%GoldCorp $20.09 $16.15 $13.06 $19.24 -19.1% 19.1%Newmont $19.11 $17.72 $11.32 $24.34 -36.1% 34.4%Kinross Gold

$2.74 $3.62 $2.38 $4.92 -34.3% 35.9%

Avg: Large Cap -30% 30.6%New Gold $4.16 $5.48 $4.82 $6.13 -12% 11.9%Detour Gold C$9.25 C$16.05 C$12.24 C$19.87 -23.7% 23.8%Centerra Gold

C$5.67 C$11.44 C$9.30 C$13.59 -18.7% 18.7%

SEMAFA C$3.56 C$3.05 C$2.54 C$3.56 -16.7% 16.7%Avg: Intermediate / Junior 17.8% 17.8%

-A Change in $100/oz in Gold can lead to a significant effect on the stock prices of these Gold Mining Companies

Source: TD securities

Trend 3 – Increase in M&A Activities

Decrease in Gross Margin

Increase in M&A Activities

Increase in M&A Activities

Increase in M&A Activities -Price weakness in Commodities continues to put pressure on Mining Industry

-M&A activities driven more by distress and opportunism rather than out and out growth seeking

-Junior miners are merging with each other recognizing that there are enormous cost savings both administrative level as well as project level

- Yamana and Agnico Eagle paid US$3.49 billion for Osisko's US$28.46 billion of gold in reserves and resources in April 2014

-Lead to possible increase in productivity and decrease in AISC

Source: EY Gold Industry Report, Credit Suisse Report

Risks and Sensitivities

Risk of the Commodity Price Fluctuation

Fluctuation in the price of gold will impact the companies’ earningsFluctuation in the price of commodity such as crude oil will impact the companies’ COGS

Risk of Operation of Mine

The operation of mines and mills is complex and is exposed to a number of risk, most of which are beyond the company’s control. Includes environmental compliance issues; personal accidents; unexpected rock formations; rock bursts

Risk of Change in Environmental Regulations

Gold Mining industry operations have extensive environmental legislation wherein a breach could result in a fines and/or penalties. Environmental legislation is evolving in a manner that means standards are stricter, and enforcement, fines and penalties for noncompliance are more stringent.

Risk of Exploration/Development Investment

Investing in early-stage exploration/development companies involves a high degree of risk and is only recommended for more risk adverse investors. In most discoveries, economic mineralization is not present in sufficient quantity to justify building a mine and recovering the investment

There are Four Main Risks to Gold Industry:

Sources: Company 10-Ks

Key Financial Ratios Company Current Market Price

% Chg from 52W High

Market Cap(US$mm)

Total Debt (US$mm)

Cash (US$mm)

EV (US$mm)

Production (000oz)2014E

AISC (US$/oz)2014E

EV/EBITDA

ABX $11.89 55.43% 14,510 13,094 2,705 24,899 6,268 $1,081 6.8

GG $19.64 66.24% 16,333 3,022 376 18,979 2,819 $937 10.0

NEM $18.40 67.15% 9,555 6,773 1,778 14,550 4,716 $1077 7.4

KGC $2.80 51.47% 3,154 2,057 836 4,375 2,695 $1032 3.6

AUY $3.78 35.26% 3,475 2,043 169 5,349 1,397 $1091 9.3

High $19.64 67.15% 16,333 13,094 2,705 24,899 6,268 1,091 10

Low $2.8 35.26% 3,154 2,043 169 4375 1397 937 3.6

Median $11.89 55.43% 9,555 3,022 836 14,550 2819 1077 7.4

Mean $11.30 55.11% 9,405.4 5,397.8 1,172.8 13,630.4 3579 1043.6 7.42

Source: Yahoo Finance, TD securities, Thomson One

Industry Rating Gold Industry Rating:

Neutral1. Industry Recap

• Companies are trying to keep their AISC to below $1000/oz in order to stay profitable and competitive

• Investment demand remains the key driver• Fear around inflation and deflation as well as geopolitical uncertainty are key price

drivers

2. Industry Outlook • Many Companies appear on track to meet full-year guidance though several require

notable improvements in 4Q14 to meet their numbers• More M&A activities to take place as companies with greater cash and stronger balance

sheet will take advantage of struggling companies.• World gold demand might increase due to current low gold price attracting strong

jewellery demand and bar hoarding

3. Continued Risk Factors• Low Gold Price likely to prompt further asset write-downs and reserve declines in the

next year• US economy seems to be recovering and restoring faith in investors. Investors

continues to divest from gold and invest in equitiesSource: Credit Suisse, TD securities, Goldman Sach Gold Industry Report