With the presidential campaign in the rearview mirror, we've gained a semblance of certainty. The Donald, donning his finest suit, will be the one to take the oath of office in January. However, President-elect Trump made some pretty big claims in the past few months -- claims that could greatly upset the status quo. And when the status quo is upset -- or even threatened -- many investors turn to gold for safety. So let's narrow our focus and see what this could mean for gold stocks in particular.
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Revealing positions on trade that, if put into practice, could dismantle the norm, Donald Trump is not one looking for the safety of a middle ground. His position on the Trans-Pacific Partnership notwithstanding -- President Obama appears uninterested in pursuing it during the lame-duck session of Congress -- Trump's approach to NAFTA alone could certainly drive the price of gold up. According to Trump, if the United States is unsuccessful in renegotiating the terms of NAFTA with its partners, he will "submit notice that the U.S. intends to withdraw from the deal."
But the effect on gold stocks transcends possible movement in the price of gold. Many gold-miners maintain operations in Canada, the U.S., and Mexico. For example, Barrick Gold (NYSE: ABX), headquartered in Toronto, has several mines in Nevada. Of these, the Cortez mine is one of Barrick's most important. In fiscal 2015, the mine accounted for 999,000 ounces of gold production -- 16% of the company's total gold production of 6.12 million ounces. If the U.S. withdraws from NAFTA, that would certainly complicate things for Barrick, as the company would have to contend with new tariffs.
Should Trump withdraw the U.S. from NAFTA, there's no guarantee that Canada and Mexico will maintain the agreement. Consequently, this would affect gold miners such as Goldcorp (NYSE: GG), which maintains operations in Canada and Mexico, as well as countries in South America. In fiscal 2015, Goldcorp's six mines in Canada and Mexico accounted for 2.3 million ounces of gold production -- nearly 67% of the company's 3.5 million ounces of total gold production.
Like most politicians, Trump has often opined on the importance of reforming the tax code; however, the similarities end there.
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During his campaign, Trump announced his intent to reduce the business tax rate from 35% to 15%, as well as eliminating the corporate alternative minimum tax. And addressing corporate profits held in offshore accounts, Trump has suggested a one-time 10% tax rate on repatriated funds.
These are aggressive goals, and it's far from certain that they will actually be implemented; nonetheless, they require our attention. Should Trump succeed in effecting these changes, though, it's fair to assume that corporate profits will soar. And when they do, investors are likely to turn to stocks, leading to a drop in the price of gold.
This isn't to say that all gold stocks are bound to plummet. Miners headquartered in the U.S., such as Denver-based companies Newmont Mining (NYSE: NEM) and Royal Gold (NASDAQ: RGLD), will suffer from the dip in the price of gold, but they will also benefit from the reduced tax rate. Newmont Mining, for example, would have paid $338 million had it been taxed at the statutory rate of 35% in fiscal 2015, but it actually ended up paying $644 million -- an effective tax rate of 66%.
Seeking gold ore but finding red ink
Although miners account for possible fall-offs in the price of gold when planning their operations, that's not to say all gold miners will be able to survive downturns with the same degrees of aplomb. Gold miners that have failed to improve the efficiency of their operations will most likely look to sustain their operations by taking on debt, since their ability to generate operational cash will be greatly hindered. On the other hand, the companies that have reduced their leverage and streamlined their operations will be much better equipped than the others.
Continuing to successfully execute its debt-reduction strategy, Barrick Gold is one company well positioned to weather a storm. Through the first nine months of fiscal 2016, the company has reduced its debt by $1.4 billion. And if it achieves its target of $2 billion in debt repayment for fiscal 2016, it will have succeeded in reducing debt by 39% since Dec. 31, 2014. Like Barrick, Newmont is also succeeding at strengthening its balance sheet. As of the end of the third quarter, the company has reduced its net debt by 13% compared with the same period last year.
The ability to control costs is another strength that should behoove both Barrick and Newmont, should the price of gold fall. Barrick is forecasting its all-in sustaining costs (AISCs) to fall between $740 and $775 per gold ounce for fiscal 2016, while Newmont is forecasting its AISCs to fall between $870 and $930 per gold ounce for the year.
There's bound to be continued volatility in the gold market as Trump takes office and begins to work toward implementing his agenda. In focusing on the gold market, though, investors must remember that there is a difference between a business and its stock. Market volatility will surely affect all gold-mining stocks; however, the underlying businesses won't all suffer in the same way. The industry leaders -- Barrick Gold and Newmont Mining -- may see their stocks fall, but the strength of the businesses will ensure that they are able to endure the turbulent times.
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