Mixed Results And Prospects For North America's Top Gold Miners

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Includes: AEM, AUY, FCX, GG, GOLD, KGC, NEM
by: Lawrence Williams
Summary

Latest estimates suggest that peak gold is not yet with us - but may be nearly there.

The major North American headquartered gold miners, some of the world's largest, are showing mixed production profiles as they continue cost controls and asset sales.

Newmont will almost certainly overtake Barrick as World No. 1 gold miner in 2018.

We, and major precious metals consultancies CPM Group and Metals Focus, have now had time to analyze the Q4 and full year gold output results for the top tier North American headquartered gold miners, and for global gold production overall. In view of that analysis, it seems apparent that the elusive ‘peak gold’ is not yet quite with us, but is close. This article primarily draws on the figures published last week in Metals Focus’ 100-page plus Gold Focus 2018 publication.

Global new mined gold output is seen as having risen around 0.5% in 2017, and is projected to rise by a somewhat similar tiny percentage in the current year. Thereafter it may well start to decline, but the downturn is taking longer to materialize than most observers and analysts have been predicting with some areas still seeing significant gold production growth – notably Russia and West Africa. The greater part of the decline in 2017 was seen in output from the World’s top producer, China, which saw a production downturn of around 7% in the year due to a government environmental crackdown which affected the country’s smaller gold miners in particular.

The table below shows the Tier 1 (plus 1 million ounce/year (31.1 metric ton/year) North American headquartered gold miners – (admittedly Yamana dropped below the 1 million ounce threshold in 2017, but only just. It did achieve production of over 1 million ounces in 2016 so we have kept it in the table)

Top Tier North American HQ’d Gold Miners – 2016/2017 Production (metric tons of gold mined)

Rank

Company

2017 Output

2016 Output

% Change

1

Barrick Gold (NYSE: ABX)

165.6

171.7

-4%

2

Newmont (NYSE: NEM)

163.8

158.1

+4%

3

Goldcorp (NYSE: GG)

79.9

89.4

-11%

4

Kinross (NYSE: KGC)

78.6

83.3

-6%

5

Agnico Eagle (NYSE: AEM)

53.3

51.7

+3%

6

Freeport (NYSE: FCX)

49.1

33.8

+45%

7

Yamana (NYSE: AUY)

30.4

39.5

-23%

Source: Metals Focus, Lawrieongold

This article concentrates primarily on the North American headquartered gold miners, all of which have quotes on the New York Stock Exchange and are thus easily tradable by the North America-based investor. For investors based in Canada, most of these companies are also quoted on the TSX as five of the Top tier gold miners are Canadian headquartered. All the North American gold producers covered are in the world's top 20 and Barrick, Newmont, Goldcorp and Kinross are Nos. 1, 2, 4 and 5 respectively on the global gold producer list.

The biggest tonnage drops in gold output among the North American mining companies were from Goldcorp (9.5 tonnes), Yamana (9.1 tonnes) and Barrick (6.1 tonnes).

Half of Goldcorp’s fall was due to the mining of lower grades at its Red Lake operations in Canada, coupled with lower comparable gold sales due to the sale of Los Filos in April 2017 to Canada’s Leagold (OTCQX:LMCNF) (TSX:LMC) and closure of Marlin in the second quarter of 2017, offset partially by higher production and sales volumes at Cerro Negro and Peñasquito. The company is guiding for another small drop in gold output in the current year to 2.5 million ounces (77.8 tons), as it completes a degree of efficiency-related restructuring.

Yamana saw significant output falls at its Mexican and Brazilian operations and since the year end has agreed to sell a majority stake in its Brio Gold (OTCPK:BRRGF) offshoot - also to Leagold which has the stated intent to become a mid-tier gold miner- Yamana has also classified its Gualcamayo mine in Argentina as an asset for sale. Assuming the Brio sale is completed and a buyer is found for Gualcamayo, Yamana is guiding for a further fall in gold output in 2018 to 900,000 ounces (28 tonnes), despite expecting the new Cerro Moro gold/silver mine in Argentina (a purchase from Extorre Gold in 2012) to come on stream and produce 85,000 ounces (2.6 tonnes) of gold and 3,750,000 ounces (117 tonnes) of silver in the year on a low All In cost basis.

Barrick’s reductions in gold output have mostly arisen from what it considers non-core asset sales, as it reduces its big debt burden, together with a sharp fall in gold output and sales from its 63.9%-owned Acacia Mining (OTC:ABGLY) in Tanzania. This latter drop in gold sales is due to an ongoing export ban on gold/copper concentrate exports, which impacts around 50% of combined production at Acacia’s Bulyanhulu and Buzwagi mines, in a dispute with the Tanzanian government. Acacia has been up for sale in the past, but the problem here is that it is too big a producer to sell at a cost most other companies might consider and has political risk issues that are probably driving potential suitors away.

Among Barrick's recent sales has been 50% of the Veladero mine in Argentina, one of its biggest gold mines, to China's Shandong Gold'. Its big Andean cross-border (Chile and Argentina) development project, Pascua Lama, on which it is already reported to have spent $6 billion remains on hold. At the same time, it now only owns 50% of the potentially big, and costly, Cerro Casale project in Chile (also on hold), having sold 25% to Goldcorp in a deferred payment plan.

From its main mines in Nevada Barrick actually saw a significant gold production rise, but even so it is only guiding for 4.5-5 million ounces (140-155.5 tonnes) in the current year, while its rival for the No. 1 gold production slot, Newmont, has set itself a target of 4.9-5.4 million ounces (152-168 tonnes) for the next couple of years. However, this could be impacted slightly by the investigations following the deaths of six workers in an accident at the Ahafo mill expansion project in Ghana. This will undoubtedly cause delays in the expansion program. Q4 2017 gold output at both the top gold miners was almost identical at 1.3 million ounces (around 40 metric tons) and with Barrick still contracting and Newmont planning for production growth their positions in the top producers table are expected to reverse.

Among the other top North American producers, Kinross is looking ahead to perhaps a small fall in output, although longer term could see good growth at Tasiast in Mauritania. Agnico Eagle is also guiding lower output this year at 1.53 million ounces (47.6 tonnes) down from over 50 tonnes in 2017.

Freeport’s position at No. 11 is a bit more of an unknown. Its enormous Grasberg copper/gold operation will continue to be one of the world’s top gold mines in its own right, even as it moves to an underground mining phase. Still, its 2018 attributable ownership could change given the Indonesian government’s desire to buy a majority stake in PT Freeport Indonesia at “a reasonable price”, including the purchase of Rio Tinto’s (NYSE:RIO) participating interest in Grasberg and converting it into shares. Freeport will, presumably, seek to negotiate a hard bargain given the time and money it has sunk in the operation in the 45 years of its mine life to date. A sale of all, or part, of this asset may indeed improve Freeport’s balance sheet but that would knock it off the table of top gold producers.

Overall though, the measures being taken by most of the major gold miners should see them all improve their cash flow positions, and in most cases reduce all in sustaining costs, putting them in the best financial position they have been in for some years. We anticipate the sector as a whole is thus due for something of a recovery once this trend is understood by the market.

Looking ahead at the global picture, Metals Focus sees a further tiny increase in overall global gold output in 2018. It sees growth coming from new projects in West Africa, Canada, Russia and Mongolia, but there is likely to be a countervailing output fall elsewhere with Chinese production continuing its downward path and other older mines closing down, or seeing falling gold output due to lower grades. It does see operating costs beginning to rise again as the measures the big miners have been taking to reduce them are beginning to run out of steam. Meanwhile a continuing decline in the dollar index could affect operating economics, particularly for those operations in countries where the currency parity against the dollar may rise- notably in Australia and Canada, two of the world’s biggest gold mining nations. Metals Focus also warns about political risk in less predictable jurisdictions – pointing to Barrick/Acacia’s problems in Tanzania as a particular case in point.

The North American gold miners have generally seen a mixed start to 2018 in terms of equity prices and have mostly been underperforming, after a positive start, due to the lacklustre gold price. Nevertheless, Newmont, Goldcorp and Freeport have all seen gains since the start of the year; Barrick, Yamana, Kinross and Agnico Eagle have seen falls. We published a number of precious metals stock recommendations at the end of last year (see: Gold, Silver, Platinum, Palladium - Price And Stock Forecasts/Recommendations For 2018) and so far they have mostly not performed that well, although several have outpaced the S&P 500 and the DJIA year to date and virtually all have done far better than Bitcoin over the same period. But it is early days yet. And if gold and silver prices perform positively over the remainder of the year, as we expect, then we could still see substantial stock price growth while general equities are looking vulnerable as the U.S. Fed continues its quantitative tightening – and we still feel Bitcoin has further to fall! (See article: Bitcoin Could Crash Another 50%, Or More, But Gold And Gold Stocks To Advance). This was written in late January when Bitcoin was still well over $11,000 on its way down from just short of $20,000 – as I write it is around $7,000 and the charts still show it as being on a declining path.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.