The surge in the US dollar has seen gold prices sink to a two-month low of US$1,850 recently. Could the pullback of ASX gold mining shares be an opportunity to diversify your portfolio and hedge potential economic and geopolitical risks amid COVID-19?
Gold prices firm for ASX shares
A stronger Australian dollar means less profit for ASX gold mining shares. Gold is typically sold in US dollars and converted to Aussie. The initial COVID-19 sell off in March saw the AUD/USD freefall to just 58 cents before a V-shaped recovery to 73 cents. This recovery meant that ASX gold mining shares did not enjoy the merits of a surging gold price to its entirety.
However, in light of gold's recent sell off from US$1,950 to US$1,850, the gold spot price has stayed firm thanks to the AUD/USD falling from 73 cents to 70 cents.
Are ASX gold mining shares a buy?
The gold spot price is central to whether or not ASX gold mining shares are a buy. The recent slump in gold prices was largely driven by the strength in the US dollar. It is difficult to gauge where gold will go from here despite rising fears about the pandemic, a weak global economy and uncertainty about the US elections. The yellow metal may need additional monetary stimulus measures to prop up its price.
With that said, many ASX gold mining shares are highly growth-orientated and focused on strategic acquisitions, expanding production and lowering all-in sustaining costs (AISC).
Evolution Mining Ltd (ASX: EVN) is one of the lowest cost gold miners on the ASX. In its record FY20 financial result, the company delivered a soaring 86% increase in underlying net profit after tax (NPAT) to $405.4 million and produced 746,463 ounces of gold. Looking ahead, the group provided the following outlook for the next three years:
- FY21: 670,000–730,000 ounces at an AISC of A$1,240–A$1,300 per ounce
- FY22: 700,000–770,000 ounces at an AISC of A$1,220–A$1,280 per ounce
- FY23: 790,000–850,000 ounces at an AISC of A$1,125–A$1,185 per ounce
Even if gold prices weaken, the company itself is expanding production and lowering costs by a modest amount in the next three years.
Alternatively, Northern Star Resources Ltd (ASX: NST) and Saracen Mineral Holdings Limited (ASX: SAR) are more growth-orientated with a joint acquisition/ownership of the KCGM mine in Western Australia. In FY20, Northern Star delivered a significant 69% increase in underlying profit after tax. It expects KCGM's cash flow to increase with full 12-month contribution in FY21.
Saracen on the other hand delivered a 93% increase in revenue and 105% increase in NPAT. This was driven by a 47% increase in gold production to 520.4 koz at an AISC of A$1,104/oz. Its FY21 guidance points to 600–640 koz at an AISC of $1,300-1,400/oz.
Foolish Takeaway
ASX gold mining shares have shown strong growth across the board in FY20. However the gold price might need more time to find a bottom and recover. I believe investors should watch closely for gold prices to improve and use ASX gold mining shares as both a defensive and growth investment.
