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

Comments are welcomed!

Tuesday, October 27, 2009

Gold Miners Minting Money

Gold Price Up, Gold Miner Earnings Expected Higher in Q309 Than Q308

Agnico-Eagle $AEM kicks off third-quarter gold miner earnings season after the bell on Wednesday, October 28. Gold producers are expected to report increases in quarter-over-quarter profits given recent strength in the price of gold and continuing operational cost containment. Third quarter over second quarter profits will likely be mixed, with a slight bias to the upside.

Macro Environment is Mixed

There are several macroeconomic cross-currents running through gold miners earnings for the quarter. Companies will be influenced by higher precious and base metal prices, stable input costs, and a weaker U.S. dollar.

Fear of inflation and a weakening U.S. dollar sent the average price of gold higher in the third quarter of 2009 to about $960 an ounce. This was a 10.3 percent increase from the $870 an ounce average during the same quarter in 2008.

Significant inputs like oil were at a record high during the third quarter of 2008 and have come down in price significantly. Cyanide and other chemicals used in the production process have also come down in price since the third quarter of 2008. Because milling gold ore is an energy intensive process, lower energy prices help reduce operating costs. In a flat operating cost environment, gold producer share prices are driven primarily by the yellow metal's price.

Companies with large metal byproduct credits in copper and zinc should see lower operating costs and improved margins from the previous quarter. Both byproduct metals have risen in price since the second quarter of 2009. Copper has gained 25 percent and zinc 19 percent. Stronger copper and zinc prices will reduce cash cost per ounce and go directly to the bottom line for companies with significant byproduct credits like Barrick Gold $ABX, Newmont $NEM, Goldcorp $GG, Agnico-Eagle $AEM, and Yamana Gold $AUY.

Exchange rate changes will negatively impact some gold miners as their costs rise in foreign currencies amid a weaker U.S. dollar. A slumping U.S. dollar has the effect of raising the cost of production for gold miners with revenue in U.S. dollars and costs in a foreign currency. Gold producers likely to see negative cash operating cost offsets due to a weaker greenback include Newmont Mining $NEM, Agnico-Eagle $AEM, and Jaguar Mining $JAG.

Looking Beyond Third Quarter Earnings

As important as recent earnings are, smart investors will look carefully at the fourth quarter guidance these companies provide. Particular attention should be paid to production forecast through the end of 2009. Gold ended September at just over $1,000 an ounce, rocketing through the previous record of $1,033.90 an ounce, and has been above $1,040 an ounce for most of October. Looking ahead and despite the recent correction under $1,040 an ounce, higher gold prices in October mean investors can expect improved profits for the fourth quarter of 2009

Special attention should be given to this week’s production guidance and updates on mine development by companies. In an early and bullish sign, Toronto-based IAMGOLD $IAG announced an increase in annual production of 30,000 additional ounces for a total of 940,000 to 950,000 ounces of gold production in 2009.

Barrick is an industry bellwether. the largest gold producer in the world by market cap and annual production. The company will announce earnings on Thursday, October 29. The company will be booking a $5.6 billion negative adjustment to close out its hedges, creating an unadjusted quarterly loss. The company is expected to report net earnings of $440 million, a 25 percent increase from the prior year’s third quarter.

Progress on Barrick’s plan to close out their hedge book will also draw close attention by industry analysts. In early September, Barrick unveiled a plan to close out their fixed hedges and begin to buy back a portion of its floating-price hedges. The company indicated in September it had already begun buying gold on the open market.

Large Barrick purchases in September and October may have had a positive impact on the rising price of gold and reduce future demand—a bearish sign. However, if Barrick only made marginal purchases over this time, it would be a bullish sign for the price of gold. Barrick’s fixed hedge book is equal to about 4 percent of total annual world-wide gold production.

Denver-based Newmont Mining $NEM and Peruvian gold producer Compania de Minas Buenaventura SA $BVN are also scheduled to report third quarter earnings on Thursday. Eldorado Gold $EGO will release their third quarter earnings report on Friday, October 30. South African gold miner Anglogold Ashanti $AU, Yamana Gold $AUY, Goldcorp $GG, Kinross $KGC, and IAMGOLD $IAG have scheduled their earnings releases for next week.

The table below provides release dates, actual Q3 2008 and Q2 2009 earnings, consensus earnings estimates, and earnings estimates provided by the Gold Stock Strategist for gold producers in the third quarter 2009.

Current global financial and monetary trends suggest dynamic changes in economic fundamentals over the long-run that are favorable for the price of gold. As long as governments around the world maintain extraordinarily liquid monetary policies and fast growing levels of public debt, gold producers will continue to mint money.

We remain in the middle stages of a long-term bull market for gold. If current trends hold and history repeats itself, the price of gold will continue to move higher over the next year within an upward trending price channel. As leveraged plays on the price of gold, this upward trend in gold price is bullish for gold producers.

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