Gold Miners Looking Less Golden

BMI View: We believe that recent released earnings of major gold miners in the Americas reflect current financial struggles and indicate continued weakness in 2014. Our forecast for falling gold prices over the course of 2014 and 2015, along with still-elevated costs, lead us to foresee persistent financial headwinds for gold miners in the coming quarters. Furthermore, gold firms are likely to see their share prices and overall financial position continue underperforming better capitalized, more diversified mining firms.

The recent release of full-year 2013 financial results for major gold miners in the Americas further underscores our bearish outlook towards the gold mining sector. Major firms Barrick, Goldcorp, Kinross released their earnings this week, while Newmont, the largest US-based gold miner, reported earnings at the end of January 2014. All four firms reported year-on-year declines in both headline revenue and net income, as well as declines in their operating margins. Elevated all-in sustaining costs as measured on a per ounce basis have squeezed margins, and based off of 2014 guidance issued by several firms we expect such costs to see minimal decreases. The aforementioned firms also, with the exception of Newmont, reported declines in their profit margins. With gold prices having fallen 27% over the course of 2013, poor results were largely expected. Still, we note that our below-consensus price outlook, which forecasts gold to average US$1,150/oz in 2014 and US$1,100/oz in 2015, leads us to see continued industry struggles in both the quarters and years ahead.

We also highlight recent deterioration in financial metrics, which further confirms our bearish outlook towards the wider gold mining industry. In particular, increasing debt-to-equity ratios across the industry suggest deteriorating debt dynamics. With gold miners taking on higher debt relative to their total equity, financing for both continued operations and expansion activities could be more difficult to obtain. Barrick, which has faced particularly acute financial difficulties, issued US$3bn of equity in 2013 to reduce its debt burden. Declining price-to-book ratios for both larger and smaller firms, as measured in a capitalization-weighted index of gold miners, suggests that valuations remain depressed. Though share prices for various gold miners have recently rallied on the back of an uptick in gold prices, we do not see this rally continuing due to our bearish gold price outlook and the general correlation between gold prices and gold mining shares.

Widespread Declines In 2013
Select Gold Miners - Revenue (LHS) & Net Income (RHS), US$bn

Gold Miners Looking Less Golden

BMI View: We believe that recent released earnings of major gold miners in the Americas reflect current financial struggles and indicate continued weakness in 2014. Our forecast for falling gold prices over the course of 2014 and 2015, along with still-elevated costs, lead us to foresee persistent financial headwinds for gold miners in the coming quarters. Furthermore, gold firms are likely to see their share prices and overall financial position continue underperforming better capitalized, more diversified mining firms.

The recent release of full-year 2013 financial results for major gold miners in the Americas further underscores our bearish outlook towards the gold mining sector. Major firms Barrick, Goldcorp, Kinross released their earnings this week, while Newmont, the largest US-based gold miner, reported earnings at the end of January 2014. All four firms reported year-on-year declines in both headline revenue and net income, as well as declines in their operating margins. Elevated all-in sustaining costs as measured on a per ounce basis have squeezed margins, and based off of 2014 guidance issued by several firms we expect such costs to see minimal decreases. The aforementioned firms also, with the exception of Newmont, reported declines in their profit margins. With gold prices having fallen 27% over the course of 2013, poor results were largely expected. Still, we note that our below-consensus price outlook, which forecasts gold to average US$1,150/oz in 2014 and US$1,100/oz in 2015, leads us to see continued industry struggles in both the quarters and years ahead.

Widespread Declines In 2013
Select Gold Miners - Revenue (LHS) & Net Income (RHS), US$bn

We also highlight recent deterioration in financial metrics, which further confirms our bearish outlook towards the wider gold mining industry. In particular, increasing debt-to-equity ratios across the industry suggest deteriorating debt dynamics. With gold miners taking on higher debt relative to their total equity, financing for both continued operations and expansion activities could be more difficult to obtain. Barrick, which has faced particularly acute financial difficulties, issued US$3bn of equity in 2013 to reduce its debt burden. Declining price-to-book ratios for both larger and smaller firms, as measured in a capitalization-weighted index of gold miners, suggests that valuations remain depressed. Though share prices for various gold miners have recently rallied on the back of an uptick in gold prices, we do not see this rally continuing due to our bearish gold price outlook and the general correlation between gold prices and gold mining shares.

Industry Seeing Continued Financial Deterioration
Select Gold Miners - Price-to-Book & Debt/Equity (RHS - Inverted), Monthly Chart

Looking ahead, we see further headwinds for the industry over both a multi-quarter and multi-year horizon due to our expectation for continued declines in capital expenditure (capex). Declines in total capex will limit firms' ability to both maintain current. As the industry grapples with moderating gold prices and continued elevated costs, we see capex falling due to financial constraints. Indeed, all four aforementioned firms have issued lower 2014 capex guidance from 2013 levels. Over the past several years, capex has trended in the same direction of prices, and we expect this correlation to continue. operations and develop new mines, and is likely to limit output growth in the coming quarters and years.

Capex Outlook Marred By Bearish Price View
Gold - Select Firms' Quarterly Capex (US$mn) & Gold Prices (US$/oz)
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