PRECIOUS METALS; Q2 RECAP - STRONG QUARTER WITH MARGINS EXPANDING CONSIDERABLY
THE TD COWEN INSIGHT
Q2 was a strong quarter for the gold producers, with 10 out of 14 companies beating consensus on EPS. Overall production was ~3% above expectations, and gross margins expanded considerably to 54.9% on the strong gold price. The short-term outlook for the sector remains very promising, with gold now trading north of $2,500/oz, at all-time highs, and gross margin expansion expected to continue.
Q2 earnings within expectations; margins continue to expand on the back of a higher gold price. Gold averaged $2,338/oz in Q2/24, an increase of ~13% from $2,072/oz in Q1/24. Gross margins expanded to 54.9% in Q2, up from 51.8% in Q1 and above the five-year average of 52.0% (Figure 5), as higher cash costs, which increased 3.2% q/q, were more than offset by a higher gold price and above-average seasonal production.
Higher q/q cash costs primarily driven by large caps. Total cash costs increased 3.2% q/
q, above the five-year Q2 average of +1.4%. Cash costs for the mid-cap producers were relatively flat q/q at +0.7%, while large-cap producers experienced a 3.8% increase over the same period. The higher q/q cash costs for large-caps was largely driven by the producers experiencing company-specific challenges during the quarter. We believe the significant cost inflation challenges the industry witnessed during the 2022/2023 time frame has significantly eased in most jurisdictions.
Free cash flow climbs materially higher in Q2. Our gold producer coverage quarterly
FCF rose ~22% q/q to $1.7bln in Q2 from $1.4bln in Q1 (Figure 8). The FCF leader for the quarter was Newmont with ~$520mm, followed by Agnico with $390mm and Barrick with $265mm. Free cash flow still remains below the levels we saw in 2020, with several producers now building expansions or growth projects (AGI, BTO, ELD, TXG, CXB, etc.).
Outlook for remainder of 2024 strong: Gold has averaged ~$2,410/oz to-date in Q3, above our forecast of $2,300/oz for the quarter. 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 Cote ramps up through 2024. We forecast industry AISC margins to reach 43.7% by Q4/24, from 31.0% in Q2/24. The five-year trailing average AISC margin is 32.4%, while the previous peak was 44.1% in Q3/20 (Figure 7).
Our top picks are Agnico-Eagle among the large caps; Alamos and Torex among the mid/ small caps; and MAG among the silvers. Our top pick among the royalties is Wheaton Precious Metals.