Is Inflation Helping Or Hurting Gold Miners?

Summary

• This is the top news for the gold & silver mining sector for the month of October 2021.
• New Found Gold is raising $48 million from a key investor and increasing its drill program.
• Equinox Gold breaks ground at a new major gold mine in Canada.
• Newmont reported higher than expected cash costs due to inflation.
• Inflation is supporting gold prices but hurting miners' cash costs. Should investors start to worry? I discuss top news and recent developments below.
• Looking for more investing ideas like this one? Get them exclusively at The Gold Bull Portfolio. Learn More »

Falcor/iStock via Getty Images

Gold Mining Bull: Top News For October 2021

It's a frustrating time to be a gold & silver mining investor as we enter the Q3 earnings season, and close out a challenging year: Gold prices (GLD) have declined by 7.8% and the VanEck gold miners index (GDX) is down 17.07% year-to-date, as of Friday, Oct. 29.

Metals prices are stuck in a tight range as gold faces a wall of resistance at its 200-day moving average ($1,793/oz) and August/September highs ($1,837/oz). Rising inflation, soaring deficits and Biden's new $1.75 trillion spending bill have not done much to move the needle just yet.

(Gold prices as of 10/29. Credit: StockCharts)

Regardless, gold miners remain attractively valued and are not getting any respect from investors, despite paying high dividends and carrying low debt. Miners are largely profitable with spot gold prices ($1,783/oz) well above average all-in sustaining cost levels ($900-$1,100/oz).

There's also downside protection to consider: The miners have a much larger margin of safety compared to the 2009-12 bull market (and following crash), when several senior gold miners went on large acquisition binges, driving up net debt levels.

For example, at one point in 2013 Barrick Gold had $12 billion net debt, which has been drastically reduced, and others have maintained lean balance sheets.

Data by YCharts

Debt reduction efforts are largely complete and should lead to higher dividends and increased M&A activity in the sector. The Kirkland Lake/Agnico merger could just be the start of a new wave.

Dividend yields are the highest I've seen in years and look sustainable even if gold fell by another $100-$200/oz:

Company	Yield	Payout ratio
Newmont Mining (NEM)	3.73%	68.48%
Yamana Gold (AUY)	2.56%	40.80%
Agnico Eagle Mines (AEM)	2.53%	54.09%
Barrick Gold (GOLD)	1.90%	31.07%
Kirkland Lake Gold (KL)	1.71%	23.77%

Click to enlarge

However, the potential for rising costs in the mining sector is one development to keep a close eye on.

Months and months of 5%+ annualized inflation - including rising labor and fuel costs - is bound to increase mining cash costs. It'll be important to see how much costs rise and how miners plan to manage these inflationary pressures.

Perhaps the industry should be investing more in solar energy, battery powered vehicles and autonomous mining fleets. This could help reduce costs, but also improve mine safety and sustainability, and tackle ESG goals.

I've put together the top news in the gold and silver mining sector for the month of October 2021, which includes major announcements such as quarterly production results or earnings reports, exploration updates, mergers and acquisitions, and other relevant news.

Please let me know if I missed any big news in the comments section below.

Honorable Mention News

Here are some notable news items that just missed making the top news list for October.

Endeavour Silver's Strong Production

The Mexico-focused silver producer reported 2.1 million silver equivalent ounces in Q3, ahead of plan, despite suspending operations at the El Compas mine.

In an interesting move, Endeavour recently acquired the Bruner gold project in Nevada for $10 million, a case of another Mexican silver miner diversifying into Nevada (First Majestic acquired the Jerritt Canyon mine earlier this year.)

First Majestic Silver Holds Back Silver Output

Speaking of First Majestic, it had a strong quarter of its own, producing 7.3 million silver equivalent ounces. The company decided to suspend silver sales in an effort to realize higher silver prices in the future.

Due to the relative weakness in the silver price throughout the quarter, we decided to suspend silver sales for the third time in the Company's history in an attempt to realize higher prices. - Keith Neumeyer, President and CEO.

Volcanic Gold Mines' Bonanza Drill Hole

The outstanding drill hole of 4.58 meters of 79.84 g/t gold also intersected 5,053 g/t silver, on the south extension of the La Peña vein at the Holly property in Guatemala.

(Credit: Volcanic Gold Mines)

On a gold equivalent basis, it's equal to 147 g/t over 4.58 meters; on a silver equivalent basis, it's equal to 10,998 g/t over 4.58 meters. This is one of the most impressive assays in the sector this year.

Northern Dynasty's PEA Study at Pebble

The challenged gold developer has released a preliminary economic assessment on the Pebble project, what it has called a "robust" project.

(Credit: Northern Dynasty feasibility study)

The numbers may look impressive at first glance: a $4.7 billion net present value (at $1,800/oz gold, $4.25/lb copper) and gold equivalent cash costs of $753/oz. It's a massive project. But its news release contains a glaring omission (perhaps on purpose), as there's no mention of upfront capex estimates.

Look at the technical report in SEDAR, and you'll find a $6.05 billion price tag, an extreme sum for any company, let alone a gold junior with a $226 million market cap. I think its financing and permitting challenges with this project are far too much to overcome.

Osisko Mining Drills 3,979 g/t over 2.3 Meters

Osisko continues to produce some of the most impressive drill holes in the industry, including the highlight assay, which is the second-highest sample ever recorded at Windfall and it represents a gram x meter of 9,151.

The intercept comes from expansion drilling rather than infill drilling, which means it will likely increase the resource rather than "prove-up" resources to reserves.

Surprisingly, Osisko Mining's stock price has not reacted positively to the latest exploration results. But its current 4.2 million ounce resource base is bound to rise from here with results like that (the company targeting 7+ million ounces, according to page 32 of its corporate presentation.)

Perhaps the upcoming resource estimate update, or an updated technical report, will change the story?

Agnico Eagle's Record Quarterly Gold Production

Agnico had a strong quarter as it prepares to merge with Kirkland Lake Gold (KL) by late-2021. The senior gold miner reported quarterly net income of $114.5 million, or net income of $0.47 per share. It produced 523,707ozAu (a record) at $1,011 all-in sustaining costs.

The strong performance at the LaRonde Complex, Goldex and Canadian Malartic mines is good news for Kirkland Lake Gold. The Abitibi assets are a key component of its merger and the basis for the ~$2 billion in synergies (over 10 years) estimated by its management.

Top 5 News for October 2021

5. IAMGOLD Grows Côté Gold District by 3+ Million Ounces

The mid-tier gold miner updated its technical report for its 70%-owned Côté gold project in Canada. Côté profiles as a top-tier asset capable of producing 316,600ozAu annually at $802/oz all-in sustaining costs over an 18-year mine life.

Also notable is the initial resource estimate of 3.35 million oz (indicated) at Gosselin, which is not included in the mine plan currently and could increase annual output and extend the mine life.

The project is now 36% completed and remains on track for H2 2023 commercial production. This is also good news for Metalla Royalty (MTA) and Royal Gold (RGLD), which both own NSR royalties on the mine.

IAMGOLD is likely thrilled to be building a gold mine in the mining-friendly jurisdiction of Ontario, especially after the recent news of an attack on its staff and contractors at the Essakane gold mine in Burkina Faso.

4. New Found Gold Lands $48 Million from Sprott, Doubles Drill Program

Top-tier gold explorer New Found Gold (NFGC) is doubling its drill program at the Queensway project in Newfoundland to 400,000 meters. It has gained more support from its second-largest shareholder, Eric Sprott, who will invest $48 million via a private placement.

The aggressive move is warranted: New Found Gold has consistently hit bonanza grades at Queensway, most recently reporting 61.50 g/t gold over 5.20 meters and 88.53 g/t gold over 3.35 meters at Keats, which is expanding in all directions, including at depth.

(The intercept of 88.53 g/t gold over 3.35 meters comes from one of the deepest holes drilled to date. Credit: New Found Gold)

Other results at Golden Joint and Lotto need to be followed up with more drilling. For example, drilling at Golden Joint returned 430.17 g/t over 5.25 meters, one of the best assays of the year.

There's potentially more high-value targets on its property along the highly-prospective Appleton Fault Zone:

To date our Queensway program has delivered three high-grade gold discoveries (Keats, Lotto, and Golden Joint) over 2.6km of strike along the Appleton Fault Zone.

At the same time, we continue to generate and advance multiple other high-grade gold targets at the Appleton and JBP Faults along +20km of strike on Queensway North. - Greg Matheson, COO.

Keats has provided outstanding assays, but I believe the explorer has barely scratched the surface with several other high-priority targets largely under-explored. The funding by Sprott and subsequent increase in its drill program are positive developments, and watch out for future drill results.

3. B2Gold Crushes Production Estimates

In 2021, B2Gold previously forecasted annual gold production to be 970,000 – 1,030,000 ounces. It looks like this guidance will be easily met as the miner announced strong Q3 2021 gold production of 310,261 ounces, representing an 18% increase year-over-year and 7% above its budget.

Given the strong quarter, B2Gold has lifted its annual guidance to fall between 1.015 to 1.055 million ounces, with all-in costs to fall between $870 - $910/oz.

(Credit: B2Gold news release)

What's more: Based on its current estimates and an average gold price of $1,800 per ounce, B2Gold expects to generate operating cash flow of $630 million for the full-year 2021, of which $500 million would be generated in H2 2021.

2. Newmont Mining Misses Earnings Due to Rising Costs

Newmont Mining (NEM) had a challenging Q3 2021. While it produced 1.45 million attributable ounces of gold and strong operating cash flows ($1.13 billion), its all-in costs rose to $1,120/oz.

Higher diesel fuel costs were partly to blame, along with higher sustaining capital spend, an unfavorable Australian dollar foreign currency exchange rate, and COVID-related labor issues in Canada.

Data by YCharts

Check out the rise in diesel fuel prices in the U.S. over the past year (diesel fuel is used in machinery to haul gold ore and overburden.)

Displacing diesel from a mining fleet can remove up to 40% of a mine site’s emissions, according to Global Mining Review. Diesel usage is also counterintuitive to the mining industry’s goal to be reach net zero carbon emissions by 2050, the article argues.

Agnico Eagle Mines also reported cost inflation in its most recent quarterly earnings:

Given rising prices for many commodities and disruptions to global supply-chains, the resulting cost pressures were gradually being pushed downstream and were starting to be reflected in the prices for a number of goods and services used by the Company.

Since then, these inflationary pressures have accelerated (e.g., diesel prices have increased by approximately 20% since August 1, 2021), and while the company continues to implement numerous initiatives to offset this, we anticipate upward cost pressure throughout the industry, including at the Company's operations.

Keep a close eye on cost pressures, as we finish 2021 and as miners start to report 2022 guidance.

1. Equinox Breaks Ground at Greenstone Gold Mines

Big news this month as Equinox Gold (EQX) announced groundbreaking for full-scale construction at the Greenstone Gold Mine in Ontario. This is a 60/40 joint venture partnership with Orion Mine Finance Group.

This is going to be one of the biggest gold mines in Canada, producing more than 400,000ozAu per year and 5+ million ounces over a 14-year mine life, at industry-leading costs of $618/oz. First gold pour is estimated for H1 2024.

Will it be a sound investment? The project requires $1.22 billion in upfront capital (up $200+ million from original estimates), split between Equinox and Orion, but still a massive sum for any miner to handle.

(Credit: Equinox Gold website)

At $1,400/oz gold it looks like a marginal project, carrying a NPV of $1.05 million (post-tax, 5% discount). Thankfully, Greenstone is highly leveraged to gold prices and that valuation soars to $1.841 billion using a $1,800/oz gold price, with a superb 28.9% IRR.

Investors should also consider exploration & development upside. The feasibility study value does not include upside potential from the Hardrock underground deposit or the nearby Brookbank, Kailey and Key Lake deposits.

What top news did I miss this past month? Let me know in the comments below.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NFGC, KL, GOLD either through stock ownership, options, or other derivatives. 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.

Comments

[Doctor Don]

Slightly prefer SIL's holdings over SLVP, but the former's div is $1.32%Y, compared to 3.49 for SLVP.

[Miners to the Moon]

@Doctor Don, prefer SILJ to both - see Andrew Hecht’s Seeking Alpha pieces over the past year.

[mikeOO]

Central Bankers are holding gold down. But with all the printing they can't keep it down forever.

[gambler007]

@mikeOO I am long gold, but I disagree that they can't keep it down.
I feel entire bond market is rigged and if they can rig bond market gold is drop in a bucket to "manipulate". Even if world stops buying T bonds, Fed print digital dollars and move into foreign banks (of course 0%) to buy T bonds (they might be doing this ..who knows). This will not end soon, as this will need rude awakening and America has way too much wealth (land, natural resources etc.) ..said that at this rate Fed printing to sustain market it is not far but at least 3-8 years away in my opinion if not more.

[panzer]

@SomaBull who writes and asks: "Please let me know if I missed any big news in the comments section below".

A serious question must be asked, since @SomaBull says the miners now offer a terrific proposition to own (although less say after today's thrashing in the POG), as to whether gold is turning into china. I do not mean the country, I mean the tableware. I have a large cabinet next to me, full of my mother's old china (which she never used, as it was too valuable and precious). Now, my brother and I think nothing of grabing a new plate of china, or a cup, because it is no longer precioius and valuable. It is just old china that is hard to give away in the modern digital age. I do not have the slightest doubt that but for cryptos, Gold would be soaring over 2500, and the miners more than double their current price, in today's inflation age. Cryptos have stolen over 2 TRILLION dollars worth of new investors who see crypto as a way of getting out of the radar, and off the grid, of the government tax men and associated thieves. These are the precise reasons people used to want to own gold. And consider this, there is a new horror that awaits gold investors: What if when digital currencies backed by the govrernment appear, the western communist movement takes a second step and simply declares gold and silver ownership to bre illegal? This next step is a trifle for the western dictatorships currently droning and owning hte populations. The governments cannot get to bitcoin, and china has tried but without success, but they can make gold and silver illegal by passing a simple law. These UniParty Establishment governements think nothing of taking this step. After all, with new software, which is not audited, they cannot be voted out of office. I think Gold is probably on its way out. That is pretty obvious in looking at its performance and its desultory habits in this inflation, crypto age. Modern investors, especially young ones, do not want it.

[TheOldHand]

@panzer I like your insight. However I have faith in government. Government will find a way to tax and control crypto -- in fact they've already started with information requests on tax forms -- and when they do, crypto's day in the sun will be over and gold will shine.

The only worrisome question is when?

[andre171]

For me, inflation will affect mining companies differently depending on their stage of development. It will increase the capex, for example, CDE foresees a 10 to 15% increase in capital expenditure because of inflationary pressures on the 4 packages not yet allocated for the modernization of its Rochester mine. Inflation and the shortage of materials and labor are expected to handicap mining companies under construction or modernization, but correspondingly lead to higher prices for precious metals. Therefore, shouldn't we give priority to mining companies who have already incurred most of their development costs, for example those who are starting to operate over others who have not yet begun their physical development. The former would have the double advantage of anticipating costs and higher selling prices?

[Harald Siebenhofer]

The Gold price can be higher go us soon, and I look on shares from MTA, an strong Streamer in the future.

[matt.wood]

The Gold price is rigged by endless paper shorts and some illegal manipulation hence JP Morgan getting fined $900 million not long ago. Gold as an investment is a waste of space until some honesty returns to the Metals Exchanges.

[MetalsMinor]

@matt.wood Pay a pennies on the dollar fine while banking billions in profit for a couple decades and screwing thousands of individual investors, gold miner shareholders, and investment funds? Sign me up for that.
Other than one or two voices notice how you never hear a peep out of mining company executives as they pull in big compensation and close their eyes to the theft taking place on their watch.

[Miners to the Moon]

HUI (Gold Miner producers) down 16 % on the year, mirroring GDX’s - 17 %. Have the weak hands all been shaken out by now?

[Apsco60]

Inflation hurts miners when the inflation adjusted money the miners mine refuses to go up in price due to paper tomfoolery.

[zorionak]

Is there a way of gauging the amount of short-selling affecting the miners? What do think are the possibilities of a short squeeze in the near future?

[Doc 224899]

@zorionak Yup.

Pull up the quote for each individual miner, and look at the number to the right of the label "short interest".

[Doc 224899]

Question: "Is Inflation Helping Or Hurting Gold Miners?"

Answer: "Yes"

Suggestion: be mindful of the Answer when making investment decisions in this sector.

[Chancer]

I am from Alfred E. Neuman University whose motto is :"What, me worry?"

NAK should give it up because they will never build Pebble as long as Democrats hold power. NAK has a better chance of building condos on their property than a mine.

In the "niche" where I buy gold miners, I am doing OK.

I have been concerned (not worried) about a possible major correction in the gold price. But the longer this is delayed, the less likely it is looking; although gold can always correct at any time- big time. You just have to remain prepared for that at all times.

[gambler007]

Don't know for Gold Miner but it definitely hurting Gold miner investors. Traditionally Gold was a hedge against inflation ..in new world BTC is hedge. :)
No one knows if/when BTC money will start flowing into Gold. We need more than Jack Dorsey to invest in physical metals to hedge against inflation. Inflation is not only guaranteed, it is visible on grocery markets and any other shopping floors. Sooner OR later the Silver and Gold train will take off ..and every day we getting closer to that day. I agree with author SILJ best way to play Silver.

[Miners to the Moon]

@gambler007, yes, SILJ + individual names PAAS, HL, AG & WPM, which I include because it streams more in silver than others in that space. Like Neumeyer’s decision to hoard some of AG’s silver for future sale - why give it away at depressed levels - he’s playing the long game, which shareholders should applaud.