Gold Miners Have Demonstrated Cost Discipline: Is There More Upside?

Where Can You Find Opportunities in the Senior Gold Miner Space?

(Continued from Prior Part)

Cost discipline

Cost discipline and lower cost assets are critical for miners, as they help miners navigate through lower metal price environments while helping improve their margins and free cash flows in times of higher metal prices. This is probably the reason that while precious metal prices have rallied in 2016, most of the miners’ 1Q16 earnings calls focused on further cost reductions. Senior gold miners like Barrick Gold (ABX), Newmont Mining (NEM), Goldcorp (GG), Kinross Gold (KGC), and Yamana Gold (AUY) have guided for lower 2016 AISC (all-in sustaining costs) as compared to costs in 2015.

Sustaining capex

Gold miners have significantly lowered their cash costs since 2012 to weather the volatile gold price environment. Overall, senior miners delivered significant ASIC reductions in 1Q16 with AISC lower than the spot for all the senior gold miners. The AISC for most of the miners were lower than expected in 1Q16 due to the lower-than-proportional spending of sustaining capital in 1Q16 as compared to the full-year guidance and weaker currencies. Going forward in 2016, sustaining capex should play catch up for some of these miners including Barrick Gold and Yamana Gold.

Focus on cost improvement

While Barrick achieved AISC of $706 per ounce in 1Q16, an impressive improvement of 24% year-over-year (or YoY), it aspires to achieve AISC of below $700 per ounce by 2019, which will be below the 25th percentile of the industry cost curve. It also lowered its AISC guidance for 2016 by 2% on the back of strength in 1Q16 and savings in operating expenses.

Despite achieving cost improvements, Kinross remains a relatively high-cost precious metals producer with 1Q16 AISC of $963. Most of the improvement in its costs stem from weaker currencies, which might wane going forward.

Along with Barrick, Newmont has also made significant progress on costs with 1Q16 AISC of $828 per ounce, which is 17% lower quarter-over-quarter and 2.5% lower year-over-year (or YoY). It also reduced its cost outlook by $20 per ounce for AISC from $900–$960 per ton to $880–$940 per ton. The company expects cost improvement in the second half of 2016 as CC&V and Leeville ramp up and Merian comes online. Over the next few years, Newmont’s costs should benefit from higher margin ounces at its new mines, higher grades at Batu Hijau and Carlin underground mines, and ongoing productivity improvements.

Yamana also delivered AISC reduction of 10% YoY to $804 in 1Q16 due to cost containment initiatives, the devaluation of foreign currencies in which Yamana operates, and higher production.

Goldcorp’s AISC for 1Q16 was $836 per ounce. That’s in line with its guidance for the year. Goldcorp’s production for 2Q16 is expected to decline 15% sequentially. This along with higher sustaining capital will also negatively impact costs in 2Q16. The second half of the year should see costs normalize as production reverts to a higher level. Goldcorp maintained its AISC guidance for 2016 of $850–$925 per ounce for 2016.

Also, the producer currencies for most of these miners have been stronger in 2016 due to the weakness in the US dollar (UUP) (USDU). This should also lead to relatively higher cash costs for miners. In the next part, let’s explore the impact of currency movements on miners.

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Browse this series on Market Realist:

• Part 1 - Which Leveraged Miners Have Outperformed?

• Part 2 - Which Gold Miner Has Optimal Geographical Exposure?

• Part 3 - Why Investors Should Understand Gold Miners’ Commodity Exposure