The gold market is still experiencing a slight pullback since its bullish run in 2010 and at the start of 2021 amid the global covid pandemic. This resulted in several stock indexes posting declines in late-morning trading as the energy and base metal sectors led the way lower.
The April gold contract was up US$1.70 at US$1,734.90 an ounce and the May copper contract was down 12 cents at US$3.95 a pound. Gold prices started the week on the defensive, which leaves the door open for further pullbacks in the very near-term. In the meantime, interest in the precious metal has given way to investors looking at the mining sector for value.
Interestingly, despite disruptions in production due to lockdown, gold miners saw record margins in 2020. Even with gold prices down from the August highs, junior gold miners were still able to generate significant cash flow in the third and fourth quarters of 2020. According to several research firms, the gold sector saw its most profitable year on record in 2020.
While record gold prices contributed for the strong performance of mining stocks and the overall performance of junior gold miners, the resilience of investor interest in safe havens was a deciding factor as well.
According to the data compiled by Metals Focus, profit margins reached a record high of $828 an ounce last year, compared to margins of $666 seen in the previous bull market in 2011.
The report said that on average, all-in-sustaining-costs increased 1.8% last year; however, the gold price increased a whopping 27%.
Since the start of 2021, gold prices have dropped more than 8% so far this year. However, gold miners expect profit margins to remain healthy. The reason for this is that the vast majority of mines are expected to operate at full capacity throughout this year since most of them were able to secure funding for their operations in 2020.
The same applies for silver producers who also saw significant margins last year, but they were no near their record highs.
There is a steady year ahead with many exploration projects already underway and many new ones planned. In February 2021, the Canadian Malartic Partnership, which consists of Yamana Gold (NYSE:AUY) (TSX:YRI), Agnico Eagle Mines, and Osisko Gold Royalties, approved the construction of the Odyssey underground project at the Canadian Malartic mine. Plans to invest US$30 million into the drilling and exploration work for this project will see royalty payments from underground production begin in 2023. In Yamana Gold's Q4 and full-year financial results, the company explained further that this approval will help to extend the mine's life up to at least the year 2039.
Similarly to 2020, a key factor in the this year’s performance will lie in the implementation of successful Covid-19 containment programs, and a close relationship with all stakeholders, from investors to host communities.