Q3 RECAP; FCF CLIMBS HIGHER, WHILE COSTS CREEP BLUNTS GROSS MARGIN GROWTH
THE TD COWEN INSIGHT
Q3/24 margins expanded slightly to 56.5% (vs. 56.3% in Q2/24). The impacts of the higher gold price (+5.9% q/q) were largely dampened by higher reported cash costs (+5.5% q/q).
Importantly, free cash flow generation amongst the TD gold producer coverage universe continues to climb, up 51% q/q to $2.8bln in Q3 from $1.8bln in Q2.
Free cash flow continues to climb materially higher in Q3. Our gold producer coverage quarterly FCF rose ~51% q/q to $2.8bln in Q3, from $1.8bln in Q2 (Figure 8). FCF still remains below the levels we saw in 2020, with several producers now building expansions or growth projects.
Forecast margin expansion partially muted by Newmont: Q3 industry gross margins of 56.5% came in below our forecast of 58.3%. Roughly three quarters of the difference vs TD was caused by Newmont, which reported cash costs 11% above our forecast. Lundin Gold (73.5%) and Agnico (63.6%) stand out, with industry leading gross margins for gold producers.
Producers expect modest inflation in 2025. Preliminary 2025 budget discussion are ongoing, however, most companies are expecting inflation to generally range from 3-5%. Producers work to offset the annual inflation through operations efficiencies, so the full inflationary effect does not always flow through to operating costs.
A constructive gold price despite the recent pullback, should bode well for miners and drive M&A. The current gold price of ~$2,600/oz, is ~5% above the Q3/24 average of $2,477/
oz. Despite the recent pullback, this remains a very constructive price environment for gold producers and should provide for strong FCF generation in Q4, in our view. Furthermore, the elevated gold price has created a supportive environment for sector M&A, in our view. Newmont has received relatively strong valuations for it's assets sold to date, with several sale processes ongoing. We expect the conclusion of this process will spur additional M&A amongst the mid-tiers.
Market for streaming deals remains robust, but the potential for more $500mm+ sized deals is slipping away. Management teams continued to highlight the depth of the deal pipeline and with potential deals focused in the ~$100-300mm size range. WPM stated that while 1 or 2 opportunities in the $500mm+ sized deals remain available in the market, they do not fit WPM's 'investment parameters'.
Our top picks are Agnico-Eagle and Kinross among the large caps; Alamos among the mid caps; and MAG among the silvers. Our top pick among the royalties is Wheaton Precious Metals.