May 09, 2022
Gold declined -1.5% to US$1,881/oz this week, its fourth consecutive weekly drop, as concerns on Fed rate hikes drove investors out of the metal as bond yields became relatively more attractive, but also possibly from selling to cover equity market losses.
The Q1/22 results season wrapped up this week, with aggregate production for the majors edging down but revenue up on much higher realized gold prices, while net income continued to slide on both exceptionals and core operating cost inflation.
The producing and junior miners both dropped, with the GDX down -2.1% and GDXJ declining -3.5%, and the Canadian juniors were mostly down, as the decline in the gold price and the broader drop in equity markets hit the sector.
Gold slid -1.5% this week to US$1,881/oz, its fourth consecutive week of declines and first time below US$1,900/oz in ten weeks. This was driven by continued aggressive rate hike talk by the US Fed which has been roiling equity markets, with the S&P 500 now down 13.9% off its December 2021 highs. We believe that the decline in gold will have been partly fundamental, with higher interest rates making bonds relatively more attractive to yieldless gold. However, there may have also been the more immediate factor of investors selling down gold, which has had decent gains over the past several months, to cover equity losses. We also note that even as rates rise, that this could be offset by a continued surge in inflation, which would mean that real bond yields, which are nominal yields minus inflation, could continue to become more heavily negative. These negative yields have been a major driver of gold over the past year as investors actually lose money for holding bonds to maturity, with the US 10-year real yield at -6.4% in March 2022, while holding gold generally only incurs a storage cost of 1.0-2.0%. Also, while the Fed is talking tough now regarding tackling inflation, global stock markets are already sliding, further declines are likely if more rate hikes come through, and a considerable recession is possible from these moves. We therefore believe that the Fed will eventually be forced politically to pull back on hikes, and that the market will price in such a scenario for gold, supporting its price.
The Q1/22 results seasons completed this week, with a dip overall in the aggregate performance of the top eight gold producers (Newmont, Barrick, Agnico-Eagle, B2Gold, Yamana, Equinox, Iamgold and Eldorado). Aggregate gold production was 3.83mn oz, down -3.4% yoy, and declining -11.1% qoq, declining to its lowest level since Q2/20 (Figure 4). Revenue growth was still strong, however, up 5.8% yoy for the quarter to $8.78bn, the highest yoy growth rate in three quarters as a major increase in realized gold prices offset the production decline, although absolute revenue declined qoq from a peak of $9.60bn (Figure 5).
Net income for the group was $834mn, down -43% yoy, and has trended down from a peak of $2.11bn in Q3/20. However, much of the weakness especially in the past two quarters have been from non-recurring items include one-time operational costs, impairments, discontinued operations and financial items not reflecting the ongoing operations of these companies. We may see less of these items after such a slew of them in recent quarters, which could give a lift to the net income of the majors. However, this could be offset by the fundamental shift of rising operating costs driven by surging inflation, which we expect to persist this year and into 2023. We can see the effect of this in the spread between the realized gold price and the all-in sustaining cost, weighted by market cap, in Figure 7. While the realized gold price was very strong during Q1/22, at $1,875/oz, its highest level since $1,916/oz in Q3/20, the AISC was also at highs of $1,163/oz. While the spread between the two prices remained high at $712/oz, it is off the highs of $912/oz set in Q3/20, when gold was surging yet inflation had yet to take off. We could see this spread contract in Q2/22 as the gold price has eased but inflation has continued to surge.
The decline in gold production in Q1/22 yoy was driven by a considerable fall for the industry giants, Barrick, down -10.1% and Newmont, down -7.6%, while only AgnicoEagle saw a substantial rise in production, up 27.8%, but this was mostly from its merger with Kirkland Lake. Production growth was weak overall for the mid-tier players, with only Iamgold seeing reasonable growth, up 11.5%, with Yamana up 2.9%, and B2Gold, Equinox and Eldorado all facing considerable declines in production yoy (Figure 8). This was offset to some degree by the big jump in the realized gold price for group, to a weighted average $1,879/oz for Q1/22, up $111/oz from $1,769/oz in Q1/21 and up $84/oz from $1,795/oz in Q4/21 (Figure 9). The rise in the realized gold price offset the decline in production for several of the majors, driving a rise in revenue for Newmont, B2Gold, Yamana and Iamgold, although revenue declined for Barrick, Equinox and Eldorado, and Agnico-Eagle's large jump in revenue was again mainly driven by the merger with Kirkland.
There has been a substantial rise in operating costs for the majors in Q1/22, with the weighted average all-in-sustaining cost rising to $1,163/oz, up $125/oz yoy from $1,038/oz in Q1/21 and up $111 yoy from $1,051/oz in Q4/21, as the broader global inflation has started to really affect the industry. From 2019 through to Q1/21, inflation had been muted, with an average AISC of $975/oz, but from Q2/21, costs had started to pick up. With global inflation increasing over Q2/22, we expect that the AISC for the industry is likely to continue to rise next quarter (Figure 11). While the rising operational costs have hit the net income of the industry in Q1/22, exceptional items, including one-time operational costs, impairment charges and financial items, have had a major effect on sector earnings for the past year. We see this in the net income of Newmont (which saw a major decline in net income in Q4/21 from non-recurring operational expenses) and especially Yamana, Equinox, Iamgold and Eldorado, with exceptional items having had a major effect in several recent quarters (Figure 12). The widely varying results for the majors across have driven quite divergent share price performance paths over the past year, with Newmont, Yamana and Barrick holding up, but Agnico-Eagle, B2Gold and Equinox all declining (Figure 13).
The producing gold miners were mostly down on the fall in the gold price and tanking equity markets, although the two giants, Newmont and Barrick both held up, as did mid-tier player B2Gold (Figure 14). The news flow was all comprised of Q1/22 results, with the rest of the majors that had not yet reported releasing their quarterly updates, including Barrick, B2Gold, Centerra, Equinox, SSR Mining, Lundin and IamGold (Figure 16).
The Canadian juniors were mainly down on the decline in gold and turmoil in equity markets (Figure 15). For the Canadian juniors operating mainly domestically, New Found Gold reported two discoveries near surface north of the Keats Zone at Queensway and commenced shipping drill core samples to MSALAB's newly commissioned Chyrsos PhotonAssay lab and Osisko Development reported a one for three consolidation of its shares as of May 4, 2022 (Figure 17). For the Canadian juniors operating mainly internationally, Orezone reported drill results from its Phase 3 program along the P17 trend at Bombore, Prime Mining reported drill results continuing to expand the Zapote North zone at Los Reyes and Mako Mining reported its Q1/22 results (Figure 18).
Disclaimer: This report is for informational use only and should not be used an alternative to the financial and legal advice of a qualified professional in business planning and investment. We do not represent that forecasts in this report will lead to a specific outcome or result, and are not liable in the event of any business action taken in whole or in part as a result of the contents of this report.