Gold prices keep smashing records giving miners hope they can escape the doldrums
Stocks of the world's largest miners have yet to catch the wave from bullion's rise
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The price of gold is smashing records on a near daily basis, yet that somehow hasn’t translated into higher profits for gold miners — at least not yet.
Analysts and portfolio managers who cover gold miners say that after years of underperforming the price of bullion, the sector is finally turning a corner. They have some evidence to support their optimism. The VanEck Gold Miners ETF, made up of the world’s largest gold miners, rose 10.5 per cent in the past month to US$33.17, roughly in line with the increase in the price of the precious metal to US$2,388 per ounce.
But even analysts recommending gold mining stocks are attaching caveats given the recent history of many companies in the sector including the largest one, Newmont Corp.
“Newmont is now guiding that (gold) production will rise from here and costs will decline,” Citigroup Inc. analysts said in a note on April 3. “This was also the same message in 2021.”
The Colorado-based miner’s free cash flow per share declined every year between 2020 and 2023, even though gold prices rose during that time, Citigroup analysts said. They cited rising costs at mines, increased capital expenditures and declining gold production among the problems, adding some investors have cast doubt on whether Newmont will be able to meet its gold production targets.
Nevertheless, the bank recommended Newmont’s stock while noting it is also bullish on gold.
Citigroup forecasts bullion could hit US$3,000 per ounce in the next 12 months in a “bullish wildcard scenario” representing a 25.7 per cent increase from gold’s current price of US$2,388 that would be on top of the 23.7 per cent increase already logged by gold over the past six months.
Meanwhile, Toronto-based Barrick Gold Corp. reported preliminary financial results this week for the first quarter to mixed reactions. BMO Capital Markets analysts called Barrick’s gold production outlook a “modest miss,” while noting the company is forecasting higher costs than expected.
Barrick’s cash costs rose seven per cent year over year, even though its production was relatively stable meaning that “mining inflation is still following through,” analysts at Citigroup said. The miner said it realized US$2,060 per ounce of gold, seven per cent more than a year ago.
With production “heavily weighted” to the second half of the year, most analysts expect the first quarter will be the mining giant’s weakest against the backdrop of ongoing gains for gold.
The latest run-up in the price of gold has come with a twist.
In recent decades, analysts said they could track the price of the precious metal based on the flow of money into or out of gold-backed exchange-traded funds (ETFs), which use investment money to accumulate bullion. But that pattern has not held in recent months.
In March, gold-backed ETFs lost US$823 million — the tenth consecutive month of net outflows, according to the World Gold Council.
Now, many analysts say gold prices are being driven by elevated bullion purchases by central banks in China and other countries.
John Hathaway, a senior portfolio manager at Sprott Asset Management USA Inc., said it’s been a strange couple of months, noting that gold has a new floor of US$2,000, that has yet to activate much interest in large gold mining companies.
“The big-cap names that most people think about have been going sideways and just haven’t made money for anybody,” he said.
One exception, he said, is Toronto-based Agnico Eagle Mines Ltd., which is now the world’s third-largest gold miner after a raft of acquisitions over the past few years.
Agnico Eagle’s share price has risen 14.3 per cent in the past year to about $87. Its net income has risen every year since 2019, from $413 million to $1.94 billion in 2023.
Inflated labour, fuel and other input costs are cutting into gold miners’ profits, Hathaway said. His pitch to investors is that while those costs may still be rising, gold will rise faster.
He said European and North American gold-backed ETFs primarily had the largest outflows while Asian investors attracted the largest inflows.
“Nobody in our part of the world, they’re not participating,” he said. “There are a number of things that could happen that could suddenly drive interest from these people that are not invested.”
One continuing point of optimism for Hathaway and others has been the success of gold sales at U.S.-based Costco Wholesale Corp. Last fall, the retailer added solid gold bars alongside jumbo-sized bags of nuts and other oversized items for sale online.
The niche business has since grown from US$100 million in sales per quarter — based on a Costco executive’s estimate in September — to possibly as high as US$200 million per month, according to a Wells Fargo & Co. analyst estimate.
That’s still far less than the monthly net outflows from gold-backed ETFs, which averaged US$2.4 billion during the past nine months.
But after years in which gold bugs complained that bitcoin and other cryptocurrencies were pulling investors away from gold, Costco’s brisk sales have boosted a belief by Hathaway and others that investors are returning to gold, and perhaps to gold miners — a sector he said has markedly shrunk in recent years.
Gold mining still represents a sizable chunk of Canada’s economy. There are roughly 700 gold mining and exploration companies listed on the Toronto Stock Exchange and TSX Venture Exchange, collectively representing 32 per cent of the 2,188 companies on both exchanges, and seven per cent of the total market capitalization.
“It won’t take a big inflow into gold mining equities to have an outsized impact and more than the percentage gain in the gold price,” Hathaway said. “That’s hard to imagine given the history and all the things you can say about the mistakes they’ve made.”
• Email: gfriedman@postmedia.com
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