Gold sector: Cost pressures and production weakness dominate reporting season

About the author:

Mat Collings
Author name:
By Mat Collings
Job title:
Research Analyst
Date posted:
04 February 2022, 9:30 AM
Sectors Covered:
Mining

  • Gold stocks largely retreated over the Q2 reporting season, with company reports focusing on cost pressures being experienced by the industry while a number of producers fell short of consensus production expectations.
  • Reported costs for WA-focused producers have risen faster than the broader peer group.
  • Concerns about the performance of North American assets weighed on the larger miners.
  • We look at several standard valuation metrics across the sector, with each metric having strengths and weaknesses and all requiring context to be best understood and interpreted.

Gold price and sentiment

The USD gold price was broadly flat for the quarter, with periodic short-term strength driven by inflation concerns. The AUD has remained softer against the USD, bolstering domestic gold producers received.

Sentiment in the sector was hit by continuing cost pressures for the industry, labour shortages in Australia broadly and WA particularly and many companies’ quarterly production coming in at the bottom end of expectations. Delivering to guidance will be critical for all producers in the second half of FY22.

Costs continue to increase, WA’s “return to normality” indefinitely delayed

Costs remained front and centre for companies during quarterly analyst calls (though production outlook for a number of names was also a concern).

AISC and AIC both rose again this quarter for our producers. On (page 3 - login to view), we break out the average reported costs for the miners and compare the global average to WA focused names – highlighting the pressure on WA operators.

Ranking the miners

No two gold miners are the same. Scale of production, jurisdiction and number of operations all factor into the market valuation. Larger miners provide relatively ‘safer’ optionality to the gold price with production spread across several operations.

Small producers may offer more leverage to the gold price, or upside from discovery or production growth, but at relatively higher risk.

As such, no metric generates a ranking that fully captures valuations. We rank and review our ASX listed gold miners on a number of metrics and consider if relative valuations are fair.

Key observations

Newcrest Mining (ASX:NCM) is our pick of the large cap miners, where we think the recent sell-off was overdone on a largely one-off event at Cadia.

RED 5 (ASX:RED) remains our key pick in the near term as it gets closer to first production at King of the Hills, which we think can be a major re-rating event for the company.

Figure 1: Gold price (AUD and USD) and All Ord Gold Index

Growth stocks have had a choppy ride since the onset of the pandemic

Source: Morgans Financial, IRESS

Find out more

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You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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