CIBC: Gold Miners Seeing Perfect Storm Of Lower Costs, Higher Prices

By Kitco News

Wednesday September 28, 2016 13:16

(Kitco News) - One Canadian bank sees a perfect storm of profits for gold and silver miners as the precious metals prices increase and costs continue to fall.

In a recent report, analysts at CIBC World Markets, described 2016 as a “transformative year” as more than 50% of the bank’s gold and all of its silver stocks are forecasted to see a reduction in All-In-Sustaining-Costs (AISC) compared to 2015. The reduction in costs comes as gold has seen its price rise by more than 25% and silver rallying almost 38%.

In its report, the bank is forecasting average AISC costs for companies under its coverage of around $899 an ounce, down from the 2015 average cost of $907. With falling costs and rising prices, the bank sees an average profit margin $364 an ounce, up from $243 an ounce seen in 2015.

According to the analysts, the mining companies that will see the best margins in the current environment are: Alamos Gold (NYSE: AGI, TSX: AGI), Acacia (LSE: ACA), Centerra (TSX: CG), Barrick (NYSE: ABX, TSX: ABX), B2Gold (NYSE: BTG, TSX: BTO) and New Gold (NYSE: NGD, TSX: NGD).

The analysts said that because of broad cost-cutting measures see in the last few years, the mining sector is seeing more “meaningful cash generation,” than compared with the profits seen during gold’s last bull market between 2005 and 2012, which saw prices hit all-time highs.

“The global gold and silver industry generally failed to convert the metal price rally of 2005 to 2012 into meaningful cash generation, as a rising cost base and re-investment of funds appear to have outweighed the motivation to accumulate cash,” the analysts said.

The bank noted that during gold’s three-year bear market, precious metals mining companies managed cut AISC by 11%, with two-third of the overall cuts coming from lower development and capital spending.

However, the analyst note that the cut in capital spending will lead to issues in gold production down the road.

The question the analysts are now asking is whether companies will remain fiscally disciplined in the face of improving balance sheets.

“Relaxation of cost control, weaker fiscal discipline and lower cut-off grades would be disappointing given the effort many gold producers have invested in improving the profitability of their business,” they said.

CIBC has been overweight the mining sector since the rally started at the beginning of the year.