'Highly profitable' gold producers boosted by higher prices, lower costs - analysts
(Kitco News) - Gold miners are benefiting on multiple fronts – higher prices for the commodity they produce, lower operating costs as prices of other commodities tumble, and in many instances an extra boost from weakness in local currencies, analysts said.
The earnings season for the first quarter is winding down, and companies as a general rule have been profitable.
“Operating margins for gold miners have taken off as costs fall and gold prices rise,” said a research note from SP Angel.
In many cases, those margins have increased from less than $100 a gold ounce to more than $500, SP Angel added.
“Gold is now a highly profitable sector, and will likely remain so for some time,” said Colin Hamilton, commodities analyst with BMO Capital Markets, adding that the gap between prices and the top end of the cost curve “has never before been so wide” for gold producers.
“And with macroeconomic policy supportive and companies more disciplined, we expect persistent profitability over the coming years,” he said.
Gold prices were already moving higher in the second half of 2019 when the Federal Reserve was cutting U.S. interest rates. Then came an economic collapse due to lockdowns and other government responses to the global COVID-19 pandemic. Since the last trading day of 2019, Comex June gold has risen 13.9% to $1,749.20 an ounce. In many countries that produce gold, the price of the metal in the local currency has hit record highs, further boosting the bottom lines for companies based in these countries.
Meanwhile, the prices of other commodities have fallen, with Nymex West Texas Intermediate crude oil down 45.8% for the year to date to $31.68 a barrel. This has helped gold miners since energy is one of their main costs outside of labor.
“Many gold miners that were struggling to make ends meet at $1,100-1,200/ounce gold have seen costs plummet,” SP Angel said. “Collapsed local currencies combined with a very substantial fall in oil prices has cut costs, particularly for open-cast miners.”
High gold prices are fueling increased investment interest in the gold-mining sector, Hamilton said. He described industry profitability “as being at a record level, helped by a cost structure which is flat to falling.”