FTSE350: Precious metals get their shine back

While sentiment toward the yellow metal was dire for much of 2018, this year has started with a host of positive developments for the safe-haven metal: speculation over a possible end to tightening of US monetary policy, hedge funds covering bearish derivative positions and the crystallisation of global economic headwinds. Should the dollar also weaken, then gold bugs will be hoping for a repeat of 2017, when a jittery greenback caused an ounce of the yellow metal to climb almost $200.

For the metal’s miners, a return to the psychologically important spot price of just under $1,300 is welcome news. And for the largest gold miners listed in London, the timing couldn’t have been better; following Randgold Resources’ merger with Barrick Gold, the field for the title of most-loved precious metals stock is now wide open.

Those hoping the $18.3bn tie-up could herald a flurry of consolidation might be disappointed. For a start, the ambition of the Randgold-Barrick deal – to create a home for five of the world’s top 10 gold mines – will be tough, if not impossible, to replicate on a similar scale. Second, even as exploration work gets more expensive, and large discoveries thin, memories of value-destructive deals stalk the industry. What’s more, gold companies already tend to trade at a premium to industrial miners, and potential buyers will be reluctant to pay much more.

But that doesn’t mean investors should walk away from the sector. On the contrary, we continue to take a broadly bullish view of the FTSE 350 gold stocks, particularly those that also offer exposure to silver. That view is based on both the idiosyncrasies of the group’s constituents, and our long-term view on precious metals – a market whose fundamentals are (refreshingly) not predicated on infinite growth. Apart from Acacia Mining (ACA), whose troubles in Tanzania are too complex and intractable to call (see below), there is something to admire in each of the £1bn-plus miners.

That’s not to imply members of the group will escape political headwinds in 2019. Investors in Fresnillo (FRES) will be keen for more detail on a series of resolutions for the mining sector proposed by the government of Mexican president Andrés Manuel López Obrador, which cover everything from increasing surveillance of company activities, to higher taxes and greater powers to indigenous communities. However, unlike Acacia, but perhaps more like Hochschild Mining (HOC) and Centamin (CEY), Fresnillo has built up a lot of goodwill with its stakeholders, and experience of managing the change that comes with new governments.

Like Egypt-focused Centamin, Fresnillo will also want to show a stabilisation in both grades and all-in sustaining costs when it releases its full-year numbers, after disappointing interim figures for both groups.