Higher prices drive gains for Canada’s gold miners
Cost reductions made in recent years are boosting margins, lifting stocks
The return of the gold bull market in 2016 is driving massive cash generation for Canada’s largest miners of the metal.
The biggest producers reported second quarter results on Wednesday night. And while the results were mixed compared with analyst expectations, the theme throughout was stronger cash flow and improving margins.
Barrick Gold Corp., the world’s biggest gold miner, had adjusted earnings of US$158 million and a whopping US$274 million of free cash flow. Kinross Gold Corp. and Agnico Eagle Mines Ltd. also reported major improvements in cash flow generation.
The results illustrate the changing times in the gold industry. Until prices rebounded early in 2016, gold miners were mired in a four-year bear market that forced them into a painful cycle of cost cuts, capital spending cuts, dividend reductions and asset sales. Now they can zero in on growth.
“Given these strong results and a more robust gold price environment, we have significantly improved our financial position, while continuing to make important investments in several of our growth projects,” Agnico chief executive Sean Boyd said in a statement.
Gold prices averaged US$1,258 in the second quarter, up 6.4 per cent from the first quarter, according to TD Securities. Silver gained 12.9 per cent in the same period, which also provided a boost to gold miners as many of them produce silver as a byproduct. Gold has jumped 25 per cent this year due to a surge in investment demand, which is linked to ultralow interest rates and a cautious economic outlook from the U.S. Federal Reserve.
In addition to rising prices, cost reductions made over the past few years are boosting margins. On Wednesday, Barrick slashed its all-in sustaining cost guidance for 2016 for the second time (to between US$750 to US$790 an ounce). Agnico lowered its cost guidance, hiked its production guidance and even raised its dividend 25 per cent, an act that would have seemed unthinkable over the last few years.
Rising gold prices are lifting stock valuations across the sector, but certain miners have performed much better than others. Barrick has been a top performer as the company executed a successful turnaround under chairman John Thornton and regained its position as the sector’s flagship company. Goldcorp Inc. has underperformed as the company cut its production guidance and faced operational challenges.
Barrick’s adjusted earnings of US14 cents a share were in line with average analyst expectations. Agnico’s results (US16 cent) were better than expected, while Kinross’s (negative US1 cent) were slightly worse.
Barrick also disclosed that it plans to sell its 50 per cent stake in the Kalgoorlie mine in Australia. This move did not come as a surprise. Kalgoorlie is a non-core asset, and Barrick has vowed to cut debt by at least US$2 billion this year. The company has already reduced debt by US$968 million since the start of January.
“Strengthening our balance sheet remains a top priority,” Barrick said in a statement.