Costs Rising For Gold Miners
Having updated their global gold cost curve model for the March quarter, Citi analysts note the benefits of weaker operating currencies and four years’ worth of austerity measures in the gold mining industry have begun to fade away. All-in costs (AIC) for the industry increased by 5.2% year-on-year in the quarter.
Austerity measures over the period included targeting higher grades, cutting capex and cutting exploration but March brought a 19% increase in capex alongside a 5% increase in cash costs. Citi expects the AIC of most producers to increase sharply in the coming years.
The analysts estimate US$130bn in cumulative capex may be needed to sustain current levels of global gold production out to 2026, which is double the market capitalisation of the top ten global gold miners. Global AIC could rise to US$1979/oz by 2023 compared to US$1190/oz in 2017.
The spot gold price is currently sitting just below US$1300/oz.
The March quarter brought an 8.9% rise in the USD gold price, outweighing the 5.2% increase in costs. However, the industry is not cash flow positive as a whole. As of March, 14% of global miners are still burning cash at current pricing, down from 33% in the December quarter, Citi estimates.
The analysts do not believe the market is fairly valuing future capital, production and costs outlooks, and as a result maintain a “bearish slant” on the sector.
Four miners are rated Neutral, including Medusa Mining ((MML)), and three are rated Sell, none of which are Australian.
Macquarie notes Australia’s Beadell Resources ((BDR)) has been deleted from the Van Eck global small cap gold index, which determines which stocks the large US fund manager will invest in. The index previously held 65m Beadell shares, or around 5% of the company.
Beadell continues to push ahead with its mill upgrade and merger with Canadian-list Golden Harp Resources, and to that end an equity placement and convertible note issue is ongoing. The company was recently forced to extend the closing date of its Share Purchase Plan for retail investors.
Macquarie also notes Doray Minerals ((DRM)) continues to report exploration success at its copper-gold mine in WA. Several high grade lodes have been delineated since mining began.
Macquarie does not cover Doray, nor do any other of the FNArena database brokers. Of gold miners under coverage, Macquarie’s top picks are St Barbara ((SBM)), Regis Resources ((RRL)) and Saracen Mineral Holding ((SAR)) among the producers, and Dacian Gold ((DCN)), Gold Road ((GOR)) and West African Resources ((WAF)) among the developer/explorers.
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