May 07, 2021
The gold price jumped 2.4% this week to US$1,815/oz, its highest level in three months, after a dip last week when bond yields briefly spiked on the strong Q1/21 US GDP growth report, but yields have since eased, driving up gold
All of the major, and most of the mid-tier, gold producers have reported their Q1/21 results, with aggregate production for the major producers rising yoy for the first time in a year, and revenue and net income growth strong on much higher gold prices yoy.
While gold producers were up 5.7% on the results and gold rebound and the juniors rose 4.5%, the Canadian juniors were mixed, as we have seen in recent weeks, with the market seeming to focus on company specific factors as much as the gold price.
Gold headed up 2.4% this week to US$1,815/oz, as yet another attempt by bears to
drive down gold did not hold, after a brief aggressive sell off on the stronger than
expected US GDP print last week, which sent US bond yields spiking, and gold down
as low as US$1,776/oz. While bond yields have eased since and gold has rebounded,
as we have shown over the past several weeks, our analysis does not show a
consistent historical relationship between the gold price and bond yields, although
this idea has certainly been in fashion so far in 2021. However, whether or not the
market buys into the bond yield and gold relationship short-term, we believe that the
medium to long-term will play out like this; inflation will eventually soar from massive
ongoing monetary printing, and gold will rise in tandem with this. Meanwhile, the
market has proved several times over the past year that it just does not believe that
gold should be valued below US$1,700/oz, given current fundamentals.
The only way gold gets hit hard, in our view, is if there is another strong period of economic growth which miraculously has no CPI inflation, as occurred from 2013- 2018. However, we don't see inflation being avoided in the current cycle and there are already signs of its picking up, with US CPI inflation near doubling in the most recently reported data. What might be the reaction to inflation by monetary authorities? First, the Fed has made clear statements that rates will not go up any time before 2023, which should support gold through the next year and a half at least. If inflation starts to take off in that time, it is very likely to propel gold up, in our view. However, if the Fed does change course and intervene in a case of rising inflation with a sharp hike in rates, the stock market and economic growth will surely take a major hit, and gold will come into play in a flight to safety, similar to what we saw in March 2020. Given the recent surge in monetary expansion, inflation is going to be difficult to avoid, and no matter which path the Fed takes in reaction to this, gold is likely to benefit.
The Q1/21 results for gold producers are almost all in, with all of the majors, and most
of the mid-tier companies having reported. Production growth for the top producers
(based on an aggregate comprising Newmont, Barrick, Agnico-Eagle, Kirkland Lake,
B2Gold,Yamana, Iamgold and Eldorado) was up for first time in a year, rising 2.6%,
compared to a -6.4% contraction in Q4/20 and -12.6% at the global-health-crisis
driven low in Q2/20 (Figure 4). Growth year on year for the next two quarters is likely
to be even stronger, as the crisis-period 2020 comparables will have relatively low
production given the shutdowns last year, with global-health crisis issues not
materially affecting production of the majors so far in 2021. Revenue was up 12.8%
yoy in Q1/21, driven by a reasonably strong rise in the gold price in, but is down from
the peak growth in Q3/19 at 42.1% and Q4/19 at 40.1%, which were driven by the
first big wave of the gold price rise after the bear market from 2013-2018 (Figure 5).
While absolute net income remained strong, the 14% yoy growth was the lowest since Q2/19, as; 1) the leverage effect from the gold price rise was lower in percentage terms between 2021 and 2020 than 2020 and 2019, and 2) there were non-recurring items not part of the core mining operations profit (Figure 6).
Production growth declined yoy for several of the miners, with especially the -11.9%
and -1.6% declines from industry leaders Barrick and Newmont weighing on the
average for the sector. This was offset by strong growth from mid-tier player AgnicoEagle, with the strongest growth of the group, up 25.6% yoy, while the other main
mid-tier player, Kirkland, saw an -8.5% decline in production. B2Gold and Yamana
saw decent mid-single growth of 3.7% and 4.6%, respectively, while Iamgold's and
Eldorado's production declined -8.2% and -3.6%, respectively (Figure 6).
The biggest single driver of the results remained the increase in the average realized gold price, which was up from $US1,588/oz (on an unweighted basis) to $US1,788/oz, or 12.4% yoy (Figure 7). This rise in the gold price offset the declines in production and drove revenue growth for all of the group except for Kirkland Lake, which saw a slight -0.5% decline in revenue yoy (Figure 8). Barrick and Newmont saw reasonable revenue growth of 8.6% and 11.3% yoy, and Agnico-Eagle saw the highest, up 39.1%, with B2Gold the second highest at 26.2%, and Yamana also strong, at 18.4%.
Cost inflation was low for the group, with the average All-In-Sustaining-Cost (AISC) for the group at US$1,001/oz in Q1/21 (on an unweighted basis) compared to US$971/oz for Q1/20, up 3.10% yoy, well below the average rise in the gold price (Figure 9). While growth in core mining operations profits was generally strong across the group, with the strong revenue growth and low cost inflation, net income growth varied widely across the group on non-core non-recurring items, and therefore these figures do not necessarily show the broader improvement in the cash generation of the sector overall (Figure 10).
The price performance of the group has obviously been hit by the weakness in the
gold price over 2021, and most have seen a decline since October 2020 of between
around -20% to -30%, except for Newmont, the largest operator in the industry, with
a decline of just -2.6% (Figure 11). However, with the gold price picking up, and our
expectations that rising inflation will further propel gold towards US$2,000/oz as early
as this year, we could see a rebound in these share prices, with the sector clearly out
of favor right now compared to many metals with broad industrial uses which have
been boosted this year by the continued economic rebound.
While Newmont has seen the strongest performance this year relative to the sector, its valuations have only risen to just near the industry averages, with an EV/Resource (based on gold equivalent ounces) of US$205/oz, compared to the group average of US$208/oz, and an EV/EBITDA of 7.91x, compared to 7.01x for the group. Barrick trades below the group at an EV/Resource of US$132/oz, and inline with the group on an EV/EBITDA of 7.08x. Agnico-Eagle is seeing the highest valuation of the group, at an EV/Resource of US$306/oz and an EV/EBITDA of 10.70x. Yamana is trading at low multiples versus the group, at an EV/Resource of US$83/oz and an EV/EBITDA of 5.50x.
All of the major gold producers were up this week on goldâ€™s gain to its highest level in three months (Figure 14). The news flow for the producers was all Q1/21 results, with Barrick, Agnico-Eagle, Kirkland Lake, Pretium, Yamana, Eldorado, Alamos, Equinox, SSR Mining and Iamgold all reporting (Figure 16). In addition to the Q1/21 results, Barrick also reported a $750mn, or $0.14/share return of capital, with the first $250mn tranche to be paid on June 15, 2021.
The Canadian juniors were mixed this week, as the market seems to have been focusing on company specific drivers as much as the gold price over at least the past month (Figure 15). For the Canadian juniors operating mainly domestically, Artemis reported an update on its Grade Control drilling program at Blackwater and Pure Gold reported the closing of a previously announced offering of flow through shares for proceeds of $17.2mn. New Found Gold reported assay results from the Keats Zone at Queensway and the first results from the 2021 drill program at Monique were reported by Probe (Figure 17). For the Canadian juniors operating mainly internationally, K92 announced a grant of 2.42mn in stock options to employees, directors and consultants at an exercise price of $8.02/share, Bluestone reported drill assays from the completed 2020 infill drilling program from the South Zone of Cerro Blanco, and Mako reported the initial results from reconnaissance exploration at the recently granted La Segoviana concession (Figure 18).
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