Q1/22 Preview: A Slow Start to the Year; Cost Pressure in Focus
The gold price averaged $1,879/oz in Q1/22, an increase of 4.6% q/q from $1,796 in Q4/21, despite the U.S. Federal Reserve (the Fed) talking more aggressively about increasing interest rates and quantitative tightening (QT) with the gold price responding to inflation fears and Russia's invasion of Ukraine. Over the first few weeks of Q2/22, the gold price continues to perform well, trading just below the $2,000/oz mark, and outflows from gold markets have been scarce, with investors seemingly happy to retain some optionality against the Fed's stated plan amid growth concerns.
Cost inflation pressure has been top of mind for investors and in conversations with a number of companies in our coverage universe, management teams appear to be expecting that 2022 y/y cost inflation, at this point, will come in at the higher end of the 5-7% range that most companies have been guiding towards. Across the board, we are hearing that diesel costs are up sharply, particularly in March, and other input/reagent costs have been experiencing additional cost pressure (explosives and cyanide).
We expect that inflationary pressure will be a key topic of discussion during Q1/22 conference calls. We have not had the sense that companies are expecting to change 2022 cost guidance ranges, given that it is too early to estimate how protracted the cost pressure will be. That being said, with cost pressure remaining high (albeit some believe that inflation pressure peaked in March) and considering the lagging impact as lower-cost inventories of reagents are worked down, we expect that added cost pressure could become more evident in Q2/22.
Production off to a slow start. As expected, many companies have indicated that Q1/22 will likely be the low point for the year for production. Mine sequencing, maintenance, COVID-19-related impacts, M&A, and geopolitics have all played a role in affecting Q1/22 production. Kinross, for example, is expected to include no production from its Russian assets for Q1/22 (and going forward), with the assets now held for sale. Agnico-Eagle's Q1/22 results will be affected by the mid-quarter closing of its merger with Kirkland Lake Gold and by COVID-19-related impacts at its Nunavut operations. In general, we expect that production will be H2/22-weighted, with several companies guiding for 40-48% of production coming in H1/22.
We are maintaining our sector OVERWEIGHT recommendation. Our top pick among the larger producers is Agnico-Eagle. Among the mid-cap and small-cap golds, we prefer SSR Mining and K92 Mining, respectively. Among the silver names, our top pick is Pan American, and we continue to prefer Franco-Nevada and Triple Flag Precious Metals among the royalty names. We expect to review our target prices and recommendations over the next several weeks during earnings seaso