Friday, November 15, 2019

Gold Equity Earnings About to Surge

Gold companies will be announcing Q3 earnings shortly with the majority reporting in the first week of November. We mentioned in our prior commentaries that the increase in gold pricing would be reflected in gold companies’ earnings materially. The average price of gold bullion in Q3 was $1,474/oz, which is 12.6% higher than the Q2 average of $1,309/oz. Using the World Gold Council’s data on gold production costs, the industry has roughly an all-in-sustaining-cost (AISC) of $900/oz.

Here we take a stab at estimating the impact of the higher gold price on gold producers’ profits. We are assuming that the Q3 industry AISC is likely to remain unchanged at $900/oz as the main component costs of labor and energy remained subdued.

  • The Q3 average gold price of $1,475/oz less industry AISC of $900/oz = $575/oz profit (40% higher)
  • The Q2 average gold price of $1,310/oz less industry AISC of $900/oz = $410/oz profit.
Q3 over Q2 profits, in general, should increase about $165/oz or 40% higher based on the 12.6% gold price increase. This quarter-over-quarter increase is materially higher than any industry that we have scanned. The operating leverage in profit increase also helps illustrate why historically gold equities typically have a 2x to 3x leverage to gold prices. High-cost producers will benefit even more as their leverage to the change in the gold price is much higher. If we use a higher cost Q3 AISC of $1,000/oz in this example, the Q3 profit will be $475/oz versus Q2 profit of $310, or 53% higher.