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Gold miners set for strong Q3'20 as operations rebound, analysts say

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Gold miners set for strong Q3'20 as operations rebound, analysts say

Strong gold prices, rebounding production and hefty margins will buoy third-quarter earnings for precious metals miners and royalty companies, according to analysts.

Canaccord Genuity analysts pointed to stable all-in sustaining costs per ounce of gold amid record-high prices as driving profits. "We forecast a record AISC margin in 2020 of $737/oz, well above the previous record of $524/oz in 2011 and roughly double the $371/oz in 2019," they said in an Oct. 15 research note.

Meanwhile, the impact of COVID-19 restrictions on gold mining operations largely dissipated in the third quarter, with miners having already restarted most mines after shutdowns earlier in the year, analysts said.

"With lockdowns now lifted and most mines back to full capacity, we expect a strong rebound in [the third quarter of 2020] and normal run-rate volumes by [the fourth quarter]," Scotiabank analysts Tanya Jakusconek and Trevor Turnbull said in a Sept. 25 research note.

In a separate Oct. 13 note, Scotiabank analysts Turnbull and Ovais Habib pointed to record gold prices in the third quarter as underpinning higher free cash flows, noting the average gold price in the third quarter was $1,909/oz, up 11% over the previous quarter and 30% over the same quarter of 2019.

"With fairly smooth restarts for most of our coverage companies following COVID-related shutdowns earlier this year, we are expecting most of our companies to report stronger q/q production and free cash flows amid record gold prices," the analysts said.

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Climbing gold prices also helped back a surge in mining-sector financings, according to S&P Global Market Intelligence research. Junior and intermediate companies raised $3.50 billion in the third quarter, the highest quarterly total in eight years, Market Intelligence analyst Christopher Galbraith said in an Oct. 14 report.

In gold-related financings, Galbraith said juniors and intermediates raised $4.05 billion in the first nine months of 2020, up 35% year over year.

Also pointing to rebounding production and strong gold prices, Eight Capital analysts Ralph Profiti and David Talbot said in an Oct. 14 report that they expect cash balances to grow quarter over quarter. The Eight Capital analysts also raised their gold price forecast, projecting a peak average price of $2,200/oz in the first quarter of 2021.

Likewise, Canaccord analysts said they remained bullish on gold prices, in part given low to negative interest rates and rising debt. "With $64 trillion in global debt yielding [less than] 1%, we believe gold provides a hedge against return-free risk," the analysts said.

Still, Profiti and Talbot cast a potential win by Democrats in the upcoming U.S. election as negative for gold. "We see the Democratic Party embracing policy initiatives aimed towards greater climate change legislation, implying potential negative impacts to the outlook for extractive industries, as well as greater financial regulation potentially negatively impacting the adoption of gold and private cryptocurrencies as instruments of store of value," the analysts wrote.

Looking at precious metals royalty and streaming companies, Jakusconek and Turnbull said they saw deal flow weakening with stronger base metal prices taking some of the pressure off miners to sell precious metals royalties and streams.

"Two of the largest potential streams (the Alpala and Oyu Tolgoi copper-gold projects) look less likely to happen after key shareholders expressed disapproval of this financing approach," the analysts said.

Rio Tinto and 50.79%-owned subsidiary Turquoise Hill Resources Ltd. agreed in September to reprofile debt and raise up to $500 million to fund an expansion at Oyu Tolgoi in Mongolia. Rio Tinto said at the time that it would not support any additional debt or other nonequity sources of funding. SolGold PLC entered a $100 million net smelter royalty financing deal regarding the Alapla project in Ecuador in May, but the deal was reportedly snubbed by shareholders.

Jakusconek and Turnbull also noted royalty companies have been forced to become more creative in assessing assets amid pandemic travel restrictions, such as Royal Gold Inc. using virtual tools for site visits and to assess exploration results. "This turned out so well it will likely continue to use these tools going forward," the analysts said.