Leading gold companies such as Goldcorp (NYSE: GG) and Yamana Gold (NYSE: AUY) haven’t done well in the stock market, and their shares have tumbled down during the year. These companies’ third-quarter earning report showed a plunge in revenues and narrower profit margins. Will these companies’ upcoming fourth-quarter report improve compared to previous quarters? If so, will it be enough to pull back up their stocks? Let’s try and answer these two questions.
During the third-quarter, major gold producers’ sales plunged: Yamana’s revenues plummeted by 25%, year over year; Goldcorp’s revenues tumbled down by 27%. Their profit margins also slimmed down during the past quarter. Will the fourth-quarter be any better? To answer this question we will have to go over the main factors that will affect their sales and profitability including: Gold price, production, and cost of production. Let’s start with the price of gold.
The slowdown in the gold market has taken its toll on gold producers. One of the reasons for the drop in gold price is the cut in demand for gold as an investment. SPDR Gold (NYSEMKT: GLD) is the world largest gold ETF with a market value of over $33 billion. This ETF also serves as a signal for the changes in the demand for gold as an investment. During 2013, the ETF’s gold holdings fell by over 38% and by nearly 9% in the past three months. The ETF’s decline in gold holdings means the demand for the ETF has softened during the year. This might further suggest the demand for gold as an investment has also diminished, which reflected in the sharp drop in the price of gold.
In the third-quarter the average price of gold was $1,300 per oz. In the fourth-quarter, up to date, the average price of gold is $1,289, which is 3% lower than the previous quarter and 25% lower than the same quarter last year. Based on these numbers, assuming all things equal, Yamana and Goldcorp will suffer a 25% drop in gold sales. But the other side of the equation is the amount of gold produced. Let’s examine what the current expectations are.
In the third-quarter, Goldcorp expanded its gold production by roughly 7%. The company slightly revised down its guidelines for 2013 from its initial annual guidelines : The total production is estimated to reach 2.65 million oz. This is a 10% increase in production compared to 2012. Based on the revised guidelines and the performance in the first three quarters of 2013, the company is expected to produce 752 thousand oz of gold in the fourth-quarter . If the company’s gold sales match the amount of gold produced, its gold sales (in oz.) could rise by 15% from the fourth-quarter in 2012. This means, the rise in gold sales will partly offset the tumble in gold price. Nonetheless, revenues from gold are still expected to drop by roughly 10% during the fourth-quarter.
Yamana has also augmented its gold production during 2013. During the first three quarters of 2013, the company improved its gold production by 4%, but its silver production fell by 8%. In total, Yamana’s precious metals production rose by 2%. Due to the modest rise in production during the first nine months of 2013, the company’s [l7] early estimates to reach an annual production of 1.32 million gold equivalent ouches, or GEO — a 10% increase compared to 2012 — seems unlikely. For this goal to be reached, the company will have to increase its current production by nearly 40% compared to the third-quarter of 2013. Therefore, it seems that Yamana will have a sharp drop in revenues, more than Goldcorp, in the fourth-quarter. Let’s turn to the changes in these companies’ cost of production.
Cost of production
Gold companies provide in their earnings reports their updated all-in sustaining costs; this measurement reflects these companies’ costs related to sustaining production. During the third-quarter, Yamana’s all-in sustaining costs for a GEO grew to $888. For Goldcorp, its all-in sustaining costs rose from $801 to $992 — a 23% gain. The company expects the cost will range between 1,050 and 1,100 during 2013. Such high all-in sustaining costs are likely to reduce these companies’ profit margin. Despite the sharp rise in production costs, these companies are working to reduce their all-in sustaining costs by developing low-cost producing mines. Until then, these companies’ profit margins are likely to further contract.
In the third-quarter, Yamana’s profitability fell from 36% in 2012 to 20%; Goldcorp’s profit margin fell to zero. The sharp rise in production costs and drop in gold price have cut down these companies’ profit margins, which are likely to remain low in the near future. But down the line, these companies might succeed in cutting down their all-in sustaining costs by developing low cost mines. Two of Goldcorp’s current development projects are expected to be low cost production. They are expected to start operate in 2014. Yamana’s biggest gold mine El Peñón has one the lowest cash costs and is expected to expand its precious metals production in the upcoming quarter . These developments could slightly improve these companies’ profit margin in the coming quarters.
The gold market hasn’t done well in the past and gold companies haven’t done any better. These companies continue to improve their gold production, which slightly offset the drop in gold prices. Moreover, the potential improvement in their production costs might also benefit these companies’ valuation. But these gold producers are still a risky investment: They have much lower profit margins than they had in the past, and aren’t likely to recover to their glory days anytime soon.
For further reading:
- Will Gold Recover from its Recent Fall?
- What Could Impede This Gold Company?
- Will The Gold Market Continue to Cool Down?
- Will Gold Continue to Dwindle?
Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.