Editorial: Golden era unfolding

With second-quarter results rolling in from the big gold miners, we’re seeing a refreshing and long-anticipated new trend: companies large and small are actually making money mining gold again.

During the down cycle, the complaining had gone on so long gold miners were starting to sound like farmers: from 1997 to mid-2001, unhedged miners agonized over falling gold prices squeezing their margins, and then from mid-2001 to the end of 2005, rising gold prices provided little relief as higher production costs ate away at the revenue gains.

But gold’s powerful move this spring above US$600 per oz. (the largest move during a single quarter in 25 years) combined with the relatively modest increases in production costs ushered in a new era of expanding profit margins for gold miners.

Looking through the gold majors’ latest quarterlies, investors are seeing a wave of record profits and gushing free cash flow stemming from a gold price that traded within a range of US$543-US$730 per oz. and averaged US$628 per oz. — US$75 higher than in the first quarter.

The newest king of the gold hill, Canada’s Barrick Gold, weighed in with record quarterly earnings of US$459 million (up from US$47 million last year) and record operating cash flow of US$643 million (up from US$101 million a year ago). Barrick realized US$592 per oz. on its gold sales, up 40% from a year earlier, meaning its margin had increased to US$300 per oz. from US$181 a year ago.

Barrick also announced it had eliminated the gold hedges it had assumed in its takeover of Placer Dome. At mid-year, Barrick had reduced its total hedge book by 7.7 million ounces, and said the fair value of its derivative positions was an unrealized loss of US$4.1 billion.

But Barrick still ended the period with a whopping US$1.4 billion in cash and equivalents and only US$2.9 billion in long-term debt. Flush with cash, Barrick’s third quarter has so far been punctuated with something we haven’t seen in a long time in the North American gold sector, and a harbinger of things to come: a brash, all-cash hostile takeover of a joint-venture partner. This time it’s a US$1.5-billion bid for NovaGold Resources in order to get its stakes in the large Donlin Creek and Galore Creek gold projects in Alaska and British Columbia, respectively.

South of the border, the formerly top-ranking and now no. 2 gold producer Newmont Mining saw its second-quarter profits almost double to US$161 million, as its margins similarly shot up to US$307 per oz. from US$179 on 1.87 million ounces of gold sales. Newmont’s kitty is also filling up, and at mid-year stood at US$1.5 billion in cash, cash equivalents and marketable securities.

Even in South Africa, where a volatile currency has made life difficult for miners, we’re seeing the same happy story with margins on gold production.AngloGold Ashanti turned in a 63% increase in adjusted headline earnings to US$140 million. It raked in US$600 per oz. for its 1.42 million ounces of production mined at a total cash cost of US$305 per oz. Again, margins expanded as realized prices rose 10% and costs actually declined, allowing the company’s cash levels to shoot up 40% to US$343 million.

Gold Fields’ recent-quarter profits jumped to US$95 million from negative US$5 million a year earlier as operating margins increased to 38% from 21% on 1 million ounces of quarterly gold output. The company closed the period with US$217 million in cash and only US$272 million in long-term loans.

Upstart major Goldcorp saw its second-quarter profits nearly double to US$190 million as it realized US$620 per oz. on 399,000 ounces sold, and drove total cash costs to minus US$123 per oz. from plus US$52 per oz. Cash and equivalents fell to US$265 million by mid-year, though, owing to the company’s cash payments to Barrick and Glencore for various gold and silver assets.

Even the perennial gold laggard Kinross Gold perked up in the second quarter, and appeared to be on cusp of a real turnaround. It celebrated record profits of US$66 million as it reaped US$625 per oz. sold, up 48% from a year ago, and produced its 404,000 ounces of gold equivalent at a sales cost of US$311 per oz. As a result, the company’s cash position has nearly tripled in the past year to US$149 million.

Moving lower down the food chain, we see a similar pattern of strong earnings, expanding margins and swelling treasuries amongst the intermediate gold producers Agnico-Eagle Mines, Meridian Gold and Glamis Gold.

This red-hot gold bull market we’re witnessing has lots of life in it yet, and gold producers’ burgeoning profits can only result in an acceleration of the merger and acquisition activity we’ve already seen in the gold sector. Exciting times!