June this year has been gold’s worst month since November 2016, as the precious metal went down 7% to $1,779 an ounce, with mining and exploration stocks following suit with a 16% drop, according to the NYSEArca Gold Bugs index.
The Financial Times reports that stronger dollar and rising bond yields have bungled gold performance, especially when Federal Reserve officials pointed to an increase of interest rates by 2023.
This is so because, the British outlet asserts, gold metal provides no yield to investors.
A Bleak Background
Given the low demand for gold at the moment, Suzanne Hutchins, fund manager at Newton Investment Management, says that the precious metal “is a great barbell: it’s OK if inflation is really high and it’s OK if you get a lot of deflation, but we are in this mid zone.”
A SAXO Markets analysis stated that the correction phase of gold won’t subside soon due to – besides strong dollar and bond yields – the effect of cryptocurrencies and lower inflation expectations.
So, on this dimly lit stage, gold companies will disclose their second-quarter earnings reports on the week of July 19, and the industry is anxiously drooling over the expert predictions.
RBC Capital Markets has released its “Gold & Precious Metals: 2Q21 Earnings Preview” for North American gold and silver producers, where the equity search firm reviews its own and the consensus estimates.
Key Predictions
According to the RBC Capital Markets preview, gold producers under coverage are set to reveal relatively untouched earnings of -1% quarter-on-quarter, showing the advantage of a 1% higher average gold price of $1,814 an ounce, and that of “2% higher production, and stable total cash costs, offset by other non-cash expenses.”
Following a bleak first-quarter performance, cash flow is predicted to increase by 62%, and despite steady earnings and greater estimated capital spending, “results reflect reduced headwinds from negative cash taxes and working capital changes previously experienced.”
Further, cash flow may also be reduced given the elevated taxes when gold hit a record price in 2020 amid the pandemic.
Back then, price climbed to more than $2,000 an ounce in August, to eventually arrive at the present situation, driven by –among other factors– investors’ optimism about the economic recovery.
RBC states in its preview that the elevated taxes phenomenon has been reported by several larger operators like B2Gold Corp, Barrick Gold Corp (NYSE:GOLD), Kirkland Lake Gold Ltd (NYSE:KL), Newmont Corporation (NYSE:NEM), and Yamana Gold Inc (NYSE:AUY).
Fully Loaded Costs
Fully loaded costs, says RBC, are bound to reach $1,393 an ounce in the second quarter, representing a 3% increase from the second quarter in 2020. However, the surge mostly replicates the favorable Q1 costs of $1,350 an ounce that were achieved due to unsustainably low capital spending.
For the whole year, fully loaded costs for RBC’s coverage are estimated to $1,417 an ounce on average (+13% YoY). “We anticipate an ongoing focus will be early indications of potential inflationary trends, which as of Q1 were not present.”
The second half of 2021 could prove decisive to determine a positive trend for those companies that performed best in the first half, or offer catch-up challenges for those that underperformed heading into the third quarter.
The Winners
The RBC’s earnings preview study has its own list of outperformers, based on earnings per share and estimate consensus.
B2Gold Corp is already lined up for positive results, with high cash tax/dividend outflows expected. Still, the favorable operating momentum in Q1 “has the potential to continue and full-year annual guidance is conservative.”
Opportunities in the second quarter include the continuation of above-guidance Fekola throughput, the early upside of Cardinal ore processing, and the persistence of above-target Masbate recoveries from oxide ore processing.
Another winner will be Franco Nevada Corp, with an increase in production expected to be driven by very high iron ore division production, as well as some ongoing benefit from high PGM production, and the benefit of high energy prices.
“A key focus will be initial performance of FNV’s iron ore investments, which are expected to contribute outsized revenues due to 6 months of production accrual from Vale and a $1.75 a share dividend from LIF.”
Among other outperformers, RBC includes Royal Gold Inc (NASDAQ:RGLD). The firm previously reported stream segment sales in line with guidance (~70% of production) as “positive royalty division results could yield financials above consensus expectations.”
SSR Mining Inc (NASDAQ:SSRM) and Agnico Eagle Mines Ltd (NYSE:AEM) are also well positioned to meet and potentially exceed the top end of guidance.
The Not-So-Winners
RBC estimates for Iamgold Corp (NYSE:IAG) are not particularly positive. The undesirable prediction can be pinned onto a string of weaker operating results, depicting a potential risk of operating cost inflation. This is due to the timelines to restart Westwood production and the comprehensive construction update at the Cote project.
Also, due to the interim Covid-related challenges at Cerro Moro and high tax payments, Yamana is predicted to fall short of estimates. The company’s production during the first half of 2021 fell by 47%.
Pan American Silver Corp’s (NASDAQ:PAAS) results are forecast to meet modest improvement, due to the ventilation shaft blockage at La Colorada, in Mexico, whose remedy is not anticipated to be complete not before the end of Q3 this year.
Another one on the downside is Coeur Mining Inc (NYSE:CDE). RBC expects “modest sequential improvement vs a weaker first quarter –– which was expected to be the weakest of 2021 –– on higher total gold/silver production across all operations.”
The slightly dull outlook is complemented by Newmont, which is “tracking to lower end of annual targets, RBCe weaker results in 2Q although in line with consensus.”
The report also predicts greater shares volatility by Barrick, Kinross Gold Corporation (NYSE:KGC), and Equinox Gold Corp (NYSEAMERICAN:EQX).
On the date of publication, the author did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.
