Miners Refocus on Long-Term Production Growth as Gold Prices Rally

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

(Continued from Prior Part)

Long-term production growth

After years of cutting back on sustained capital expenditure, gold miners have started to refocus on production growth as gold prices (GLD) remain buoyant in 2016. The sustained growth is one of the prerequisites for sustainable outperformance over the long term.

Strong project pipeline

Newmont Mining (NEM) maintained its gold production guidance of 4.8 million–5.3 million ounces for 2016. Production in 2017 is expected to be higher at 5.2 million–5.7 million ounces as Long Canyon comes online. For three years after that, production could be in the range of 4.5 million–5.0 million ounces. The company sees an end to the higher grade phase at Batu Hijau, leading to lower production in 2018 and beyond compared to 2017. This guidance, however, has an upside if the projects that are not yet approved do get approved. Those projects could contribute 250,000–400,000 ounces starting in 2018.

Please read Newmont Continues to Boast a Strong Project Pipeline to see the potential upside from its growth projects.

Goldcorp (GG) has maintained its production guidance of 2.8 million–3.1 million ounces for 2016. However, it disappointed the markets in 4Q15 when it reduced its three-year forward guidance. Goldcorp gave a three-year forward production guidance of 2.8 million–3.1 million ounces for 2016, 2017, and 2018. Previously, the company guided for higher production guidance at 3.3 million–3.7 million ounces per year. There could be an upside to this guidance as some of the projects are not included in the guidance. Goldcorp recently acquired Kaminak Gold , which likely won’t start contributing before 2019. However, some more acquisitions could move the needle on the company’s medium-to-long-term production profile.

Upside potential

Barrick Gold (ABX) maintained its 2016 production guidance of 5.0 million–5.5 million ounces. Its expected production for 2018 is slightly lower at 4.6 million–5.1 million ounces. Based on its current asset mix, the company expects to maintain annual production of at least 4.5 million ounces of gold through 2020. With its falling production forecast, the company is looking for exploration targets including Alturas. The company’s strategy is to go for growth through optimization and exploration. It’s focusing on its existing mines for improvement to deliver high returns rather than focusing on quantity at any cost.

Yamana Gold’s (AUY) production guidance doesn’t include the upside potential from the C1 Santa Luz project and the Barnat Extension of the Canadian Malartic mine. The company highlighted positive exploration results at some of its near-mine targets that should drive resource to reserve conversion. However, as compared to its peers, its production profile doesn’t look very attractive.

Resource conversion

Kinross Gold (KGC) expects to convert a substantial part of Bald Mountain’s 4 million ounces of resources to reserves as it continues with infill drilling. This should support higher production and also enhance the life of the operation. In addition, Kinross also announced that it will go ahead with its Tasiast Expansion Phase One, which should also lead to production upside beginning in 2018. As we’ll discuss later in the series, Kinross also has a cash balance to pursue acquisition opportunities to increase its production potential. Along with geographical risk, its growth potential is one concern that investors have.

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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