August 01, 2022
Gold rose 2.1% to US$1,763/oz as the Fed came through with an expected 75 bps rate hike, but the Fed Chairman commented that it could ease off on the aggressive hikes depending on upcoming data, the first dovish sign in many months.
Big Gold is in the middle of Q2/22 results, with Newmont, Agnico-Eagle, Yamana and Alamos reporting decent numbers overall, with moderate production growth, a high gold price and subdued costs, although Newmont was below market estimates.
The producers rose, with the GDX up 3.4%, but this was outpaced by the juniors, with the GDX up 9.2%, while the TSXV larger juniors surged, many by double digits, as the Fed's hints at easing off hikes led to a more risk on sentiment in equity markets.
Gold jumped 2.1% to US$1,763/oz, as the Fed raised interest rates 75 bps, but Fed
Chairman Powell's comments after the increase indicated that the Central Bank
would consider slowing the pace of rate hikes depending on upcoming economic
data. While the Fed also indicated that it was willing to accept a period of economic
growth 'below trend' in order to curb inflation, overall the news was received
extremely well by the equity markets, prompting a more 'risk on' sentiment. This
buoyed small caps specifically for the first time in many months, and along with it,
the junior gold miners, while the sector was also supported by the rebound in the
gold price. Gold still remains one of the best performing asset classes over the past
year, down just -1.9%, compared to an -11.7% plunge for S&P 500, while producing
gold stocks, using the GDX ETF as a proxy, are down -12.5% (Figure 4).
The junior gold miners, using the GDXJ as a proxy, were down as much as 23% at their trough over the past two weeks, nearly 9.0% below the producing gold miners, as the slide in both small cap equity and gold had seen it take a double hit. However, the sudden revival of risk on sentiment has seen the GDXJ rebound substantially and it is now only about a percent below the Russell 2000 small cap index for the year, and about two percent below the producers. However, we still recommend some caution here, as while the Fed could slow the degree or pace of its rate hikes, inflation is hardly under control yet. A series of 50 bps hikes, even if more widely spaced between upcoming Fed meetings, would very likely continue to put significant pressure on equity markets. We recommend that investors stay cautious given that this recent pickup could be yet another bear market rally, and that it will likely be some time before inflation is curbed and the Fed returns to truly easy monetary policy.
Figure 5 shows just how aggressive the Fed's recent rate hikes have been, with its Effective Funds Rate rising twenty-eight-fold from 0.08% in early 2022 to 2.33% currently, and now on track towards its pre-global health crisis peak of 2.42% in 2019 (Figure 5). The US economy is already beginning to feel the effects of this, as US GDP growth quarter-on-quarter declined for the second consecutive quarter in Q2/22, down -0.9%, after declining -1.6% in Q1/22, although growth in Europe has not declined (Figure 6). With two quarters of consecutive contraction generally considered the definition of a recession, this may have caused the Fed to ease off from the aggressive language of the past several months. The Fed may be expecting the recession to reduce demand and have a disinflationary effect on the economy. However, while they have indicated a period of low growth would be acceptable to them if it starts to bring down inflation, we expect that with another couple of quarters of contraction, even more dovish language could enter the Fed's statements.
As for the gold price, the Fed's more dovish language has been enough for a considerable rebound off the recent lows just under US$1,700/oz. We had been concerned that gold could continue to decline below this level given over a month-long downtrend. The Fed until this week had shown no signs of backing off on its aggressive rate hikes, whatever the fallout for equity markets and the economy, with neither a bear market in the S&P or the 1.6% one quarter plunge in GDP seeing it ease up. It appears that actually entering a clear recession in the US, however, has been enough for the Fed to have proven to itself that it is at least having some dampening effect on the economy, and that this could start to drag down inflation. Of course, there is always the spectre of stagflation looming, where the Fed is successful at curbing economic growth with its hikes, but inflation remains high as simply too much money was printed in reaction to the global crisis and is still sloshing around the system. We could argue that the US has already been in stagflation for two quarters, a condition which should be supportive of gold, especially if combined with the Fed's suddenly more dovish comments.
The Q2/22 results season for big gold is ongoing, with several majors having already reported, including Newmont, Agnico-Eagle, Yamana and Alamos, with only Barrick, B2Gold and Eldorado still yet to release second quarter results of the largest cap gold producers. The results so far have been decent, with reasonable production growth and high realized gold prices driving revenue growth and reasonably contained costs driving operating profit, even with surging global CPI inflation. Net income was generally strong as several companies exited a period where exceptional items had been hitting their bottom line for the past few quarters.
Gold production overall across the four companies picked up, driven by Newmont, by far the largest producer, up 3% yoy in Q2/22 after an -8% decline in Q1/22 (Figure 7). While Agnico-Eagle had the highest growth, up 63% yoy, after 28% in the previous quarter, this was mostly driven by its merger with Kirkland Lake, completed in February 2022, making Q2/22 the newly combined company's first full quarter of production. Yamana's production grew 3%, down from 10% in the previous quarter, and Alamos saw a -21% decline, its weakest growth in the past year. While average realized gold prices edged down off their most recent Q1/22 peak, they were still high in the context of the past year, ranging from US$1,836/oz for Newmont to US$1,871/oz for Alamos (Figure 8). Revenue growth for Q2/22 was flat yoy for Newmont on its low gold price versus the group, with Agnico-Eagle's revenue up 61% on the merger, Yamana's rising 11%, and Alamos' revenue down just -2% as its high relative gold price offset the decline in production for Q2/22 (Figure 9).
Costs for the group remained reasonably subdued given surging global inflation. Newmont saw the highest rise in its all-in-sustaining-cost (AISC) versus Q1/22, up 15.8%, or US$164/oz to US$1,199/oz, which led to it missing analysts' estimates and a substantial decline in its share price on the results. Agnico-Eagle's AISC was actually down US$-11/oz yoy to US$1,026/oz, Yamana's AISC was up just US$3/oz to US$1,084/oz and Alamos' increased US$34/oz to US$1,170/oz. Newmont's net income declined -40% in Q2/22 yoy after a particularly strong Q1/21, but in absolute terms was still strong, especially compared to a negative net income in Q4/21 on exceptional items. Exceptional items related to the merger had also hit the net income growth of Agnico-Eagle for the past few quarters, and without these, net income rose a strong 40% in Q2/22. The net income of Yamana and Alamos had also been hit by exceptionals in recent quarters, but in Q2/22 net income rose 64% and 104%, respectively, on a lack of any large negative one-off accounting items.
The producing miners were mainly up on the gains in gold and equity markets, except for Newmont which saw a large decline after reporting Q1/22 and missing estimates (Figure 12). Three other major gold producers also reported Q2/22 results, AgnicoEagle, with its first full quarter since the merger with Kirkland in February 2022, Yamana and Alamos. Centerra saw shareholders approve its plan of arrangement, which was completed, with the company disposing of its Kumtor Mine holding, which is now entirely controlled by Kyrgyzaltan and the Kyrgyz Republic. NovaGold reported drill results from Donlin and Equinox reported that construction is 35% complete on its Greenstone project and that its credit facility has been revised up to a maximum $700mn from $300mn (Figure 14).
The Canadian juniors were mostly up, with many seeing strong double-digit gains on the rise in gold and equity markets (Figure 15). For the Canadian juniors operating mainly domestically, Artemis Gold completed an agreement for a $140mn equipment lease for its mining fleet with Capterpillar and Eskay Mining reported the discovery of multiple new volcanogenic massive sulphide targets from four zones at Scarlet Ridge. Turdor Gold reported drill results from Treaty Creek and Probe Metals from the Monique Zone of Val-d'Or East (Figure 15). For the Canadian juniors operating mainly internationally, Mako Mining reported drill results from Crucita, a new zone at the Las Conchitas-North area of San Albino-Murra, over one kilometer south of the San Albino mine (Figure 16).
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