Precious metals equity analysts at National Bank expect to see improving production and lower cash costs in third-quarter financial reports across the sector “as inflationary pressures have been noted to be easing.”
“The Turkish lira and Mexican Peso continued to depreciate, providing a potential tailwind,” they said. “Under the current robust metal price environment and expected strong FCF generation, We are looking for management commentary around capital allocation plans, and we expect the overall financial leverage of the sector to come down as debt is likely to be repaid with some of the strong cash flows.”
In a report released Wednesday, they updated their estimates heading into earnings season, emphasizing “stabilizing opex and increasing gold prices leads to robust FCF generation.”
“In this more recent cost environment, aided by modestly weakening FX rates and a robust 2H24 operational outlook, we see the potential for COGS/GEO to improve and help drive robust FCF generation,” they said. “The gold price (shown under the quarter labels on the x-axis) has increased from a quarterly average of US$1,879/oz in 1Q22 to US$2,477/oz in 3Q24 and is expected to move even higher in 4Q24. We believe the sector needs to demonstrate this expected better cost control (and thus margin expansion) and disciplined capital allocation to attract the generalist investor to the space. In our view, Q3 earnings could be the catalyst the sector has been waiting for to see the generalist step in and invest in the space. We expect the strong FCF generation to lead to debt reduction as well as the funding of capital return programs (dividends and/or share repurchases), as well as advancing project pipelines. Projects are being advanced as cash flows rise, but for the most part, we see them being approved on a gold price assumption that seems conservative to the current spot price and more in line with where we see the industry fully-baked AISC curve shifting over the medium-to-longer term, which we believe is fair and should help avoid financial pitfalls going forward.”
“Consensus estimates remain fluid, thus modest differentials vs. NBF may be explained, while larger gaps are a source for our conviction beats/misses. At the time of writing, we have conviction in Agnico Eagle (AEM.TO), Eldorado Gold (ELD.TO), IAMGOLD (IMG.TO) and MAG Silver (MAG.TO) beating consensus Adj. EPS estimates, while we expect Wesdome (WDO.TO) to miss. ... For concentrate producers, provisional pricing adjustments are expected to be a net positive for 3Q24 earnings. Timing of sales could also prove positive on average realized gold and/or silver prices given the strong finish to the quarter for both metals.”