CIBC NotesJune 24, 2022 Beyond The Headlines
Mine Builders Caught In The Crosshairs Of
Inflation
Inflation Hits Projects Hardest
Our Conclusion
Inflation is the topic on investors minds. And while operating cost escalation
is not to be ignored, we conclude that the companies that are the worst off
from an inflation standpoint are those in build-mode. Inflation is markedly
higher for project capital costs than it is for operating costs. This trend
translates from large companies right down to the small-cap stocks.
Key Points
Investors Are Still Concerned About Inflation, And Rightly So: Going
forward, investors will need to be more discerning in the gold space.
Assuming no benefit of a gold price lift in the near term, the margin for error
has gotten slimmer. We examine again, fully loaded costs (FLC) to
determine the true margins for the sector, evaluate the major components of
cost escalation and identify companies with the most risk. We also provide a
review of recent project costs to show the impact that the decision to build
has on companies’ fortunes in this environment.
Key Industry Conclusions From Our Analysis: 1) FLC for the sector are
$1,668/oz (median range of $1,400-$2,100/oz) with total capex adding nearly
$492/oz to the $790/oz costs in 2022. 2) Development and growth capex
inflation is 4x (over 40% increase) as much as operating costs inflation
(~6%-9% increases). 3) If you have to build, it’s much less risky and cost
effective to build on a brownfields site. Greenfields projects are consuming
~$250/oz ($150-$400/oz per contained oz) in capex while brownfields are on
average ~$100/oz.
Key Stock Conclusions: With this report we are downgrading EQX to
Underperformer and revising our price target to C$5.75 (from C$9.25).
Despite the fairly low trading P/NAV multiple, which reflects some risk at the
Greenstone project, we believe that the company’s higher capex weighting
implies risk and we do not see how it will trade in line with peers during a
build-out. We also reiterate our Underperformer rating on IAG, where the
stock, having previously bottomed, is somewhat pricing in a resolution of the
capex and funding woes, which may be premature. We favour AEM and
GOLD for their lower relative capex exposure over NCM (which we favour
the least out of the >2Moz producers), and NEM given its relative amount of
project spending, which could see further cost headwinds. We are more
constructive on KGC and CG in consideration of their relatively lower capex
weighting and believe that EDV (Massawa and Fetekro) and BTG
(Gramalote) are reflecting the risk associated with impending capex
spending and are trading cheaply despite a good ranking on FLC within the
sector.