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Analysts expect gold miners' margins to climb on back of strong Q3'19 gold price

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 expect gold miners' margins to climb on back of strong Q3'19 gold price

With a slew of North American gold miners on the cusp of releasing third-quarter earnings, analysts said they expect to see expanding margins on the back of a stronger gold price quarter over quarter.

"Quarterly cash flow is going to be a lot better because gold was US$1,309 per ounce last quarter," Haywood Securities analyst Kerry Smith said in an interview. "It's around US$1,474/oz this quarter."

Smith and other analysts noted that North America-listed gold miners largely appear to have kept costs under control amid gold's climb.

But the strong price of gold may come as a double-edged sword for some gold producers with investors expecting them to deliver fatter margins in the third quarter, BMO Capital Markets analyst Andrew Kaip said in an Oct. 17 note.

"With the run up in the prices of gold and silver in the third quarter, we are of the view that investors are looking for evidence that the gold miners can realize margin expansion through higher earnings, cash flow and free cash flow," Kaip said. "Those that do will be rewarded."

RBC Capital Markets analysts led by Stephen Walker, its head of global mining research, also saw stronger earnings on the horizon. In an Oct. 18 note, the analysts said prices of gold and silver were respectively up 12% and 14% quarter over quarter, more than offsetting their expectations for a 4% quarter-over-quarter climb in all-in sustaining costs.

More generally, analysts see reason to be optimistic about the prospects for North American gold equities, pointing to potential in investment diversification amid sluggish global growth.

"In our view, the North American precious metal equities offer an appealing opportunity for investors that are looking for a hedge to slowing global economic growth, structurally lower real rates, global geopolitical uncertainty and broader market volatility," the RBC Capital Markets team wrote.

Investors may also begin to scrutinize North American companies against competitors in Australia, seeing more value among the former, Smith said, pointing to labor costs and hedging. He noted that Australia-listed miners tend to hold bigger hedge books, which can mute earnings as the price of gold rises.

"A lot of their hedge books are underwater," Smith said.

At the same time, labor has become increasingly expensive in Australia, where gold miners have to vie for workers in a market where major iron ore miners with fat margins are willing to "pay up," Smith said. In contrast, labor costs in North America have been relatively stable, he said.

Given those issues, Smith pointed to the possibility of some investors shifting focus away from Australian and toward North American equities. "I could see a bit of a rotation out of the Australian stocks that have done really well," Smith said.

Looking at potential earnings surprises, Smith said he saw potential for Barrick Gold Corp. to beat expectations, partly owing to its ongoing integration of operations after its takeover of Randgold and its joint venture with Newmont Goldcorp Corp. covering key Nevada assets.

Kaip flagged Eldorado Gold Corp. and Newmont as companies where consensus may be overly rosy, while he saw potential for Royal Gold Inc. and Pretium Resources Inc. to beat expectations.

RBC Capital Markets said B2Gold Corp. and Franco-Nevada Corp. may do better than expected in the third quarter, with the former benefiting from its Fekola expansion in Mali and the latter reaping contributions from royalties on ramping up operations such as Cobre Panama. The RBC Capital analysts also flagged potential for negative surprises from Newmont, IAMGOLD Corp., Dundee Precious Metals Inc. and Guyana Goldfields Inc.

Ahead of third-quarter earnings, RBC Capital decreased price targets for Alamos Gold Inc., Endeavour Mining Corp. and Torex Gold Resources Inc. by 7%, 3% and 8%, respectively.