As major gold miners report earnings, a key question is how they plan to utilize their profits amid record-high gold prices.
"With the sharp and sustained move higher in gold prices, we think that there will be an increased focus on capital allocation in the sector – whether companies might increase dividends, buyback shares… or whether any projects in the pipeline might get more attention," Bank of America analysts said in a note.
Miners face tension between several options. On the one hand, as they remove gold from the ground, they need to keep replenishing their bankable deposits by exploring, which means spending money on drill programs. They're also looking to extend the life of mines they already have, as major new gold discoveries are increasingly rare.
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They also have the choice between using free cash to pay off debt or buy other mining companies, which offers a quick way to bulk up on gold holdings but is also expensive, as the acquiring company often must pay a premium for the target company.
Other options for cash flow include returning money to shareholders in the form of share buybacks or dividends, or simply keeping cash on hand for a rainy day.
This earnings season, gold miners are expected to report significantly higher cash flow.
RBC analysts are expecting senior producers in its coverage universe to report free cash flow at 2.5-year quarterly highs and a 45% increase in quarter-on-quarter earnings even though production will be flat, as all in sustaining costs, a key metric for miners, will rise just 1%.
"Investor preferences have been biased to share buy backs more recently, given the underperformance of gold equities’ operating leverage vs. gold," RBC Capital Markets analysts said in a note. "However, operators have leaned to focus on project opportunities and a prioritization of debt repayment ahead of meaningful return of capital."
Do Newmont's Results Offer a Crystal Ball?
Last week, Newmont Corp. NEM, the biggest gold miner in the world, reported earnings and revenue that beat expectations even though its production was down because of problems at several mines.
The company's free cash flow surged almost 14 times to $594 million as its average realized gold price jumped more than 19% to $2,347 per ounce, but all-in sustaining costs—an important mining metric—rose just 6% to $1,562 per ounce.
That offers an example of why mining companies are considered a leveraged play on the price of gold. Because their costs are relatively fixed, an increase in the price of gold can boost their margins at a faster rate than the rising price of gold itself.
With Newmont's results perhaps providing a rough template for what's to come, here's a look at three other senior gold producers that are scheduled to report financial results in coming days.
Agnico Eagle AEM Reports Wednesday
With much of the low-hanging fruit already picked in terms of gold deposits, it is crucial for companies to increase their resource estimates and develop new mines.
Agnico is developing an underground mine at its existing Detour Lake open pit mine site, with a view to boosting the mine’s production to a million ounces a year over 14 years starting in 2030, Zacks Equity Research notes.
"The company continues to lower debt levels while focusing on capital discipline and cost control, investing in its project pipeline, and providing returns to shareholders," Zacks said.
With recent gold price strength, the Bank of America analysts said that they'll be looking for the company's updated views on capital allocation for debt repayment versus share buybacks or investment in exploration and growth.
"AEM repurchased $20mn of shares on its buyback in Q1’24, but we still think debt reduction is a key priority for the company as they have been messaging so," the analysts said.
The Bank of America analysts will also be looking for operational, development or exploration updates for various assets the company has, as well as inflation commentary as there have been rising labor costs because of competition for talent in certain areas where Agnico operates.
The RBC analysts are forecasting another quarter of healthy free cash flow generation for the company and are also expecting that capital allocation could be discussed.
"AEM previously outlined it would prioritize repayment of some near-term debt maturities, and it has completed modest share buybacks, while growth capital allocation could increase with various projects potentially advancing," the RBC note said.
Jefferies analysts said they are expecting higher quarter-on-quarter earnings and cash flow because of stronger gold prices in the second quarter.
Kinross Gold Corp. KGC Reports Wednesday
When Kinross reports this week, the Bank of America analysts expect all eyes to be on operational performance.
They will be focused on exploration progress, permitting and any updates on the timing of a preliminary economic assessment for the company's Great Bear property. They'll also be looking to hear about how its Tasiast mine is performing after an expansion, and updates for its Manh Choh property, which is expected to deliver first production in the third quarter.
With strong gold prices, the analysts are also looking for whether management will offer views on potential mine life extensions.
As with Agnico, capital returns could be a hot topic.
"What will be KGC’s focus with respect to capital returns in 2024, particularly how it views the current dividend versus buy-back opportunities and also balancing that against key projects such as Great Bear amongst others," the Bank of America analysts said. "Additionally, we’ll be seeking color on whether the recent run-up in gold prices to record highs changes management’s capital returns thinking at all."
The RBC analysts are expecting a slight decline in production and higher costs quarter-on-quarter for Kinross. They're also expecting higher second quarter free cash flow generation on higher gold prices despite higher cash taxes.
The RBC analysts are also looking for word on the status of the Tasiast ramp up after the expansion and performance of a solar power plant there after it was completed in the first quarter.
"We expect higher Q2 gold prices to offset a dip in production and drive a quarterly step up in earnings and cash flow," the Jefferies analysts said.
Barrick Gold Corp. GOLD Reports on Aug. 12
Barrick Gold, the world's No. 2 producer of the precious metal after Newmont, is scheduled to report on Aug. 12.
Jefferies analysts are expecting quarter-on-quarter earnings and cash flow to be higher because of gold sales from the company's African assets and higher gold prices.
"Lumwana, North Mara, Kibali, Tongon and Bulyanhulu should be responsible for the bulk of the sequential production/sales increase, and costs should remain relatively flat," the analysts said.
Elsewhere in Africa, there are reports that authorities in Mali could be seeking to expropriate Barrick's Loulo-Gounkoto complex.
The Bank of America analyst said they'll be looking for management to offer any updates on negotiations or discussions with the government on that.
Investors and analysts are waiting on word of the ramp-up at Barrick's Pueblo Viejo in terms of increasing production and decreasing costs, the analysts said.
"With the recent gold price strength, we’ll be seeking updated views on capital allocation priorities: particularly capital return (the buy back) and investment in exploration and projects," the analysts said.
The RBC analysts are expecting low output and higher tax payments to weigh on Barrick's free cash flow during the quarter.
"Capital allocation priorities will be of note as Barrick has outlined a shift to copper growth investment at Reko Diq and the Lumwana Superpit projects, where FSs (feasibility studies) are guided to be completed by YE24," RBC said. "Barrick previously approved a share buyback which has not been utilized, despite higher gold prices ytd and weak share performance—any potential commentary on this will be of note."
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