EQUITY RESEARCH
July 15, 2024 Earnings Revision
Precious Metals Preview: Show Me The
Money
Q2/24 A Taste Of The Free Cash Flow Growth Coming In H2/24
And 2025
Our Conclusion
Operational Weakness Likely To Take A Back Seat To The Earnings
and FCF Growth Story: Q2/24 metals prices averaged $2,336/oz for gold, a
stunning 12.7% Q/Q increase over Q1/24, and $28.73/oz for silver, an even
more impressive 23% Q/Q rise. Strength in the gold price was driven by a
flight to safety in the Eastern markets (Central Bank buying and Chinese
consumer demand) and secondarily in the Western markets, with ETF
inflows driven by impending rate cuts. We believe a strong gold price
environment is here to stay and recently revised our gold price forecasts
upwards, with a forecast of $2,600/oz in 2025 (link to note).
More importantly, strength in the gold price, combined with more modest
cost increases than in the prior three years, is setting up for strong margin
expansion in the sector, which in turn could provide a re-rating of multiples in
the gold space. As we had noted in our Q1/24 preview, Q2/24 is the quarter
where we expect FCF and earnings growth, with the rise in metal prices
more than outpacing minor operational softness. While we see some
companies with sluggish operational quarters this quarter, we expect the free
cash growth to trump all else.
Key Points
Good Setup For Q2/24, Even Better In Q3/24: With the spot price of gold
currently 12.7% higher than the Q1/24 average price, and with costs
expected to decline from Q1/24 levels, we believe the outlook is favouring
Q2/24 earnings and cashflow growth. Moving forward, we anticipate the
majority of producers will realize margin expansion as the 23% increase in
the price of gold more than offsets Y/Y cost increases in 2024.
Notables Into The Quarter: We highlight AEM, KGC, and LUG, which we
believe could beat expectations. Of the seniors, we expect AEM and KGC
will continue to deliver FCF growth; NEM and ABX to have an FCF inflection,
with NEM’s swinging from negative in Q1/24 to positive in Q2/24 (despite a
weaker operational Q); and GOLD’s FCF to move from flat to positive, this
quarter. We expect the FCF inflection for EDV to come in Q3/24 and for BTG
in Q4/24.
Q2/24 Upcoming Earnings And Margin Growth Should Bring About
Multiple Re-rating: Gold stock valuations from 2021 to H1/23 had been
marred by margin compression as modest increases in the average gold
price were not enough to offset rising costs. With margin growth expected in
Q2/24 and beyond, we expect a re-rate could start with Q2/24 results.
Longer-term Top Picks: Our top picks in the sector remain Agnico Eagle,
Kinross Gold, Pan American Silver and Wheaton Precious Metals.