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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Wednesday, May 6, 2009

Gold Producer's Mid-Season Earnings Review

There are two items that investors are looking for with gold mining companies. The first item is earnings. Cash is king in the aftermath of the greatest global financial deleveraging in 80 years and investors want to see increased earnings. Beating consensus estimates is the name of the game in this environment.

The second item is reduction in the cash costs per ounce to produce an ounce of gold and other expenses (general and administrative, exploration, development, & maintenance). Controlling costs goes right to the bottom line and that’s what investors are increasingly focused on.

The following is a the chart of the YTD performance of 10 major gold miners with their actual 2008 cash cost per ounce along the x axis. Now in general, those companies that have done well this year have relatively low cash costs, like Yamana Gold or Buenaventura.

Others may have relatively lower cash costs per ounce, but have market or operational factors that are projected to significantly change their cash cost projections for 2009.

For example companies that mine base metals as by-products have large by-product credits. These by-product credits are subtracted from the cash cost per ounce of gold. Now, because, base metals prices crashed in the second half of 2008, cash costs per ounce to mine gold will rise in 2009 for companies with a large share of gold mining by-products.

Other companies may be reducing costs that are not captured by cash cost per ounce and so the chart could be misleading. For example, Gold Fields is reducing their capital expenditure for exploration, development and mine maintenance by 40 percent in 2009 and that is probably why their share price has done well despite the fact that they have a high cash cost per ounce profile for 2008.

Barrick on the other hand has relatively low cash costs, but had higher cash costs reported in the latest earnings call. Barrick said that it had net cash costs of US$404 per ounce in the most recent quarter, compared to net cash costs of US$250 per ounce a year earlier. You can see on the chart that their 2008 cash costs per ounce of gold mined was $337. Barrick has a large share of by-product credits and has been hurt by the base metals crash. This was expected and why Barrick is lagging other major gold producers in share price performance.

Last week, four companies released earnings: Agnico-Eagle, Barrick Gold, Buenaventura, and Newmont mining.

Here is a short synopsis of what they announced.

Newmont’s (NEM) earnings per share was cut in half, from $0.80 a share from a year earlier to $0.40. Excluding special items, Newmont’s earnings per share came in at $0.44, better than consensus estimates of $0.42. The company sold 1.3 million ounces of gold in the quarter at $906 ounce. Their outlook for 2009 is for total gold sales of 5.2 to 5.5 ounces of gold with costs applicable to sales of $400-$440 an ounce.

Barrick Gold (ABX) also reported earnings per share for the first quarter of $0.34, excluding special items, 2 cents lower than consensus estimates of $0.36. Realized prices for gold were down from the same period a year ago, from $925 an ounce to $912 an ounce, and cash costs reached $484 an ounce. Barrick reiterated its 2009 production guidance of 7.2 million to 7.6 million ounces of gold with cash costs per ounce of US $360 to US $385. The Company expects higher production rates and lower costs in the second half of the year.

Buenaventura (BVN), a Peruvian precious-metals producer, posted first- quarter earnings of 39 cents a share compared with a loss of 25 cents a year earlier. Earnings per share still fell short of the 45-cent consensus estimate. Buenaventura sold gold at an average of $911 an ounce in the quarter, down 2 percent from a year earlier. The Company is also taking advantage of gold prices after unwinding their hedge book last year. General and administrative expenses and exploration spending was cut by almost 40 percent from last quarter.

Toronto-based gold miner Agnico-Eagle (AEM) nearly doubled its quarterly profit compared with a year ago, helped out by one-time gains. Earnings were 35 cents per share, compared consensus estimates of 10 cents a share. Gold production in the first quarter was 91,812 ounces. The company said gold output in 2009 is expected to be 550,000 ounces to 575,000 ounces, rising to about 1.2 million ounces in 2010.

After the market close yesterday, Kinross Gold (KGC), Canada’s third- largest gold producer, said net income was 11 cents a share, equal to last year’s 11 cents. Earnings, excluding some one-time items, were 10 cents a share, falling below the consensus estimate of 13 cents. Gold-equivalent production during the quarter rose 59 percent to 526,888 ounces, while costs decreased 11 percent to $419 an ounce.

Also yesterday, Yamana Gold (AUY) surprised analysts by reporting net earnings per share of 12 cents or 8 cents adjusted, beating consensus estimates of 6 cents a share adjusted. Gold production rose 15 percent to 271,482 ounces, falling below company targets of 290,000 ounces. Costs per ounce rose to $379 from $371 in the year-before quarter Yamana confirmed guidance for production of between 1.3 million and 1.4 million gold equivalent ounces in 2009; 1.4 million and 1.5 million in 2010; and building to 2 million ounces by 2012.

Tomorrow, Eldorado Gold (EGO), Gold Fields (GFI), Goldcorp (GG) and Randgold (GOLD) will report their earnings and on Friday, Harmony Gold reports.

Next week IAMGOLD (IAG) and AngloGold Ashanti (AU) will report their earnings.

I am most interested in the earnings reports of the African gold miners Gold Fields, Randgold, Harmony Gold, and AngloGold Ashanti.

My reasoning is that company costs are denominated in the South African Rand and other African currencies, but revenue comes from gold sales in U.S. dollars. A relatively strong dollar in the first quarter of 2009 should help to increase margins for the African miners. The South African miners, based in Johannesburg, produce most of their gold in South Africa, the world’s third-biggest producer after China and the U.S. Another reason is that last year's production was stilted with regional power outages and mine accidents that have, so far, not repeated themselves.

AngloGold is expected to post 43 cents a share excluding one-time items, after a 50 cent loss in the preceding quarter.

Gold Fields, reporting tomorrow is expected to double earnings from a year ago to 10 cents a share.

Harmony Gold’s earnings, released a day later, are expected to rise 20 percent from a year earlier to 22 cents a share.Of course, Randgold mines primarily in West Africa and is more of a growth play than the other African gold miners. Ounces produced in 2009 should increase by almost 15 percent from 2008. Quarterly earnings are expected to be 15 cents per share for Randgold.

Judging by the results at halftime for the major gold miners first quarter 2009 earnings season, the score is Miners 3, Analysts 3 with 7 more companies to report in the next 7 business days.

So as we enter the second half of the earnings season for gold producers, keep your eye on whether they beat consensus earnings and whether they are effectively controlling costs, especially cash cost per ounce. Companies that execute well on these two indicators are likely to finish the year at higher share prices.


Gold Stock Strategist
Full disclosure: I do not own shares in any of these companies.

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