Gold producers to come in from cold in 2024

Gold producer profit margins are forecast to increase this year and going forward, as inflation cools and productivity advances drive margin expansion, according to research from BMO Capital Markets.

All-in-sustaining costs increased 8.5% in 2023 to an estimated US$1298/oz across all producers and are forecast to fall 14% this year to $1118/oz based on BMO's "bottoms up" analysis of each company's 2024 outlook.

Margin improvement, in turn, is expected to close the valuation gap between equities and the underlying gold price, which hit an all-time US dollar record in December 2023, and has so far spent 2024 above the $2000/oz level.

In January, John Hathaway, senior portfolio manager at Sprott Asset Management, wrote about the compelling investment case for gold mining stocks. Hathaway reflected upon mining stock valuations being at their lowest in 25 years, with the spread between the gold price and the discount implied to spot for equities of $700/oz.

"This discrepancy suggests that the market is not fully reflecting the value of these companies," he wrote.

Widening margins and improved profitability will see gold producers strengthen their balance sheets with growing cash balances, enabling some to make more aggressive inroads into their debt loads, invest more in exploration and development, or fund acquisitions and shareholder returns.

"The market may not fully appreciate the potential returns that could be generated from gold mining equities, leading to their undervaluation. This lack of recognition of the sector's investment potential contributes to the current undervaluation of gold stocks," Hathaway wrote.

With cash balances forecast to increase, Hathaway said that the pace of mergers and acquisitions should increase as the sector addresses the decline in reserves, which sees the gold mining industry "in a quasi-liquidation mode".

Data from Bloomberg shows that the reserve life of the top 10 gold miners has fallen by 33% in the last 10 years from 590Moz in 2011 to 395Moz in 2022, despite the reserve price being bumped from $1200/oz to $1300-1400/oz.

"We do think impatient shareholders could welcome predatory M&A," Hathaway said.