RE:RE:Impressive dilution TD Outlook for Au.
It was a relatively good Q1 for the sector with 16 out of 29 companies beating on an EPS basis, and only six missing. Overall production was ~3% above expectations. The near-term outlook for the sector is very strong, with Q2 being the first quarter with elevated gold prices (to-date, close to $2,350/oz, 13% higher than the Q1 average), which should result in strong earnings and cash flow.
Stronger-than-expected Q1; margins expand on the back of higher gold price. Gold averaged $2,072/oz in Q1/24, an increase of ~5% from $1,979/oz in Q4/23. Gross margins expanded to 51.8% in Q1, up from 49.9% in Q4 and just above the 10-year average of 49.8% (Figure 4), as higher cash costs, which increased 1.4% q/q, were more than offset by a higher gold price and above-average seasonal production.
Inflationary cost pressures continue to ease. Total cash costs increased 1.4% q/q, well below the five-year Q1 average of +6.8%, due to lower inflation and seasonality. Cash costs for the large-cap producers were essentially flat q/q at +0.5%.
Mid- to small-cap producers experienced a 4% increase in cash costs over the same period, largely driven by a few producers experiencing company-specific challenges during the quarter. We believe the significant cost inflation we saw during the 2022/2023 time frame should now be easing.
Free cash flow climbs in Q1, still well below levels of 2020/2021. Our gold producer coverage quarterly FCF rose ~63% q/q to $0.8bln in Q1 from $0.5bln in Q4/23 (Figure 7). The FCF leader for the quarter was Newmont with $518mm, followed by Agnico with $390mm and Kinross with $104mm.
Free cash flow remains well below the levels we saw in 2020 and 2021, with several producers now building expansions or growth projects (AGI, BTO, EQX, ELD, TXG, CXB, etc.).
Outlook for remainder of 2024 strong: Gold has averaged $2,343/oz to-date in Q2, relatively in line with our forecast of $2,350/oz. We believe companies are well-positioned to grow margins through 2024 as the industry realizes higher gold prices and inflationary pressures abate.
We forecast industry AISC should also decline through the year, driven by increased production, particularly at Barrick's/Newmont's Pueblo Viejo and Nevada Gold Mines. IAMGOLD management is also expecting material production growth as Ct ramps up through 2024.
We forecast industry AISC margins to reach 42% in Q4/24, from 26% in Q1/24. The five-year trailing average AISC margin is 31%, while the previous peak was 43% in Q3/20
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My views we will see those dog days of summer and some price stability before moving higher this fall or unless interest rates rise? If there is some opportunity to increase holdings my guess is this is the time to make it happen. No reason not to expect CXB to move with additional drill results increased gold valuation and V.Lake progress. I'll go with analyst expectations we'll see $2.75 as a resonable target.
As for IAU it may be the best buy entry point even at slightly higher prices once and if and when the confirm a Joint Venture. Analyst expectations remain positive with prices higher than CXB who has added a bunch of shares compared to IAU and that has not hurt investors who bought in on the merger with Marathon Gold Corp. I see lots of upside for IAU if they are creative enough to move ahead?