Mining and metals: a focus on gold

Our experts look at the current and future performance of key commodities in the mining and metals industry. In this issue, we focus on gold, looking at what’s on the horizon for the gold mining industry this year and how management teams can prepare.

What is on the horizon for gold mining businesses?

Gold prices are exceeding $2,000 per ounce. This is in line with peak prices observed during the relatively early stages of the Coronavirus pandemic. Prices have remained relatively high and have remained above $1,600 per ounce since the middle of 2020, reflecting a sustained period of investor attraction to this asset. 

Gold prices generally rise during periods of economic uncertainty and economic downturn as it is seen as a safe asset of stable value. When share prices are volatile and there’s a risk of default in other asset classes, investors will diversify their portfolios with investments in gold. The economic impact of the pandemic, particularly high inflation and economic uncertainty caused by Russia’s invasion of Ukraine and the conflict in the Middle East has meant that gold prices have remained high.

Some softening of gold prices should be expected once investor confidence in the economy returns. The possibility that the Federal Reserve will begin cutting interest rates before June has led investors’ demand for gold to cool, as gold futures have fallen from December 2023’s peak. The potential for earlier interest rate cuts may help maintain current prices in the short term as investments in currency offer lower returns. However, these cuts also reflect growing confidence that inflation can be reined in which may push investors to other asset classes.

Considerations for businesses leaders

Below, we summarise the key risks on the horizon in 2024 for gold management teams along with recommendations on how they can prepare and mitigate against risk.

Inflationary pressures and high interest rate environment 

Inflationary pressures in recent years have impacted junior miners and pushed up operational costs. In addition, the high interest rate environment has resulted in higher cost of borrowing, making operations more costly than the pre-pandemic era. Careful planning is needed in the event of a potential drop in gold prices. Adjustments to cash flow projections should be made to account for possible decreases in revenue that could affect business viability. 

Management teams should review the robustness of cash flow forecasts and plan for an appropriate response if prices decline at an accelerated rate. This may include renegotiating facilities, deferred capital expenditure or cost cutting measures.

Geo-political instability 

Given geo-political instability, such as threats to shipping in the Red Sea, management teams should consider potential supply chain delays, and explore alternative shipping options or routes to market.

Falling interest rates

While the main impact on gold prices will come from geo-political instability, the anticipated global decline in interest rates may drive up the price of gold. 

Potential falls in interest rates allow management teams an opportunity to review their capital structure as part of investment in infrastructure.

Increased focus on ESG reporting

ESG is progressively shaping the business agenda across all mining and metals businesses due to its increased importance for investors. ESG impacts metal businesses in a few ways. 

Sustainability linked loans might have more favourable terms, which can be very helpful in an era of restrictive financial conditions and high interest rates. 

In addition, there might be more scrutiny and ESG regulations along the supply chain. Being industry leaders in ESG could help businesses stand out.

Managing changing regulations 

As international corporates, gold mining businesses are subject to changing regulations, such as IFRS and the Economic Crime and Corporate Transparency Act (ECCTA).

ECCTA is viewed as the most comprehensive legislation tackling economic crime in the UK in a generation. It creates a new corporate ‘failure to prevent fraud’ offence for large organisations. A company will be guilty of the offence if any person associated with it commits fraud (or other economic crimes listed in the Act) for the benefit of the company. The only defence an organisation has is to have had reasonable procedures in place to prevent fraud.

Of note to mining companies is that similar to ‘failure to prevent bribery’ and ‘failure to prevent tax evasion’, this new corporate offence also has extra-territorial application. With the offence expected to come into effect in the next few months (following the publication of ‘reasonable procedures’ guidance), management of UK-based miners will need to start a process to identify fraud risk, train personnel and review existing fraud control frameworks at its operations worldwide.

Funding and debt options

With the current high costs of debt, we are seeing management teams considering the potential use of hedging instruments and/or optimising the capital structure for their businesses.

How RSM can help 

We work with a wide variety of clients in the mining and metals sector across the UK and globally. We can support your business with the following key areas of expertise:

• global network/capabilities, including audit and tax;
• global mobility support;
• advice on systems compliance with UK and wider regulations;
• advice on economic crime risk and investigations support;
• corporate governance, including ESG;
• financial controls when dealing with remote operational locations; 
• capital markets transactions; and
• model audit and due diligence assignments for lenders and developers.

Please contact Paul Watts, Graham Ricketts or David Hough if you would like to discuss how these issues may impact your business.