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Analysts see strong Q1'20 gold prices boosting earnings despite coronavirus

Greenhouse gas and gold mines Nearly 1 ton of CO2 emitted per ounce of gold produced in 2019

Essential Metals & Mining Insights - September 2020

Essential Metals & Mining Insights - August 2020

State of the Market: Mining Q2-2020


Analysts see strong Q1'20 gold prices boosting earnings despite coronavirus

Analysts expect strong gold prices to bolster gold mining earnings in the first quarter of 2020, with coronavirus-related mine suspensions mostly weighing on earnings in the second quarter.

In the first quarter, the price of gold climbed and closed at US$1,612.10 per ounce on March 31, up from US$1,520.50/oz on Dec. 31, 2019. While gold prices dropped in mid-March, closing at US$1,475.03/oz on March 19 amid a broader rout in stock markets, the yellow metal recovered relatively quickly as investors sought safe-haven assets.

The price of gold averaged US$1,582/oz for the three-month period, the highest quarterly average since the first quarter of 2013 and a 6.75% increase over the fourth quarter of 2019, TD Securities analyst Greg Barnes said in an April 23 note.

Analysts expect higher gold prices to buoy free cash flow as companies continue to focus on containing mining costs. "The first quarter of 2020 should provide the first taste of the [free cash flow] to come," Barnes said.

Efforts to contain the new coronavirus started to unfold in the first quarter with a slew of producers announcing plans to suspend some operations, generally following government guidance. But the suspensions did not start to flow until late March or early April, meaning the impact on production will more likely be felt in the second quarter.

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Haywood Securities analyst Kerry Smith told S&P Global Market Intelligence that overall first-quarter results for gold miners should be in line with expectations. "Shutdowns didn't happen until later in March, so they shouldn't have much impact," the analyst said.

Suspensions came as a patchwork both globally and within key gold producing countries. In Canada for example, Quebec mandated a suspension of mining activity through the first half of April, while much of the rest of the country allowed mining operations to continue. Meanwhile, key gold mining regions in the U.S. such as Nevada, where Newmont Corp. and Barrick Gold Corp. have major operations, were left relatively unscathed.

Market Intelligence gold mining analyst Christopher Galbraith said in an April 7 note that he expects gold production to fall about 10% in 2020, mostly due to the coronavirus.

Seasonal weakness in production could also weigh on gold output, Scotiabank analyst Trevor Turnbull said in an April 16 note. "We are expecting most of our coverage companies to report lower [quarter-over-quarter] production and higher realized prices following a strong finish to 2019," Turnbull said.

Increasingly bullish gold price forecasts helped drive a positive view of the gold mining sector, despite the impact of coronavirus. Among the more bullish forecasts, Bank of America analysts recently lifted their 18-month gold price target from US$2,000/oz to US$3,000/oz. In an April 20 note titled "The Fed can't print gold," the analysts made the case, as have many other gold bulls, that stimulus from the Federal Reserve will give the precious metal a lift.

"True, a strong USD backdrop, reduced financial market volatility, and lower jewelry demand in India and China could remain headwinds for gold," the analysts said. "But beyond traditional gold supply and demand fundamentals, financial repression is back on an extraordinary scale."

Other analysts covering gold miners outlined more conservative gold price projections, but still raised price targets. National Bank of Canada analysts bumped their 2020 gold price forecast to US$1,689/oz from US$1,530/oz in an April 22 note. Barnes raised his 2020 gold price target to US$1,746/oz from US$1,650/oz, and Turnbull increased his target to US$1,652/oz from US$1,550/oz.

Gold has recently traded for over US$1,700/oz.

Jeffrey Christian, managing partner of CPM Group, told Market Intelligence that he expects gold prices to be volatile in 2020, trading between US$1,550/oz, or possibly lower, and US$1,800/oz. "Our latest estimate is that gold might average around US$1,698/oz this year, surpassing 2012's record US$1,670/oz average price," he said.