Trucks drive in the Fimiston Open Pit mine, which is partially owned by Barrick Gold Corp., in Kalgoorlie, Australia, on Aug. 3, 2015.Carla Gottgens/Bloomberg
It's showtime for the hottest sector of the Canadian stock market.
After markets close on Wednesday, four major gold producers – Agnico Eagle Mines Ltd., Barrick Gold Corp., Goldcorp Inc. and Kinross Gold Corp. – will roll out their second-quarter results within minutes of one another.
The flurry of reports will indicate how the industry is coping with an unexpected outbreak of prosperity and offer important clues about whether Canada's biggest gold producers are prepared to open their wallets and start spending again.
Gold and gold stocks had stagnated for years before suddenly reversing course in January and reaching for the stratosphere. Each of the four big Canadian producers has gained at least 50 per cent since then. Barrick and Kinross have more than doubled, thanks to improving operations and a firmer gold price.
Gold is up about 25 per cent on the year, closing just below $1,325 (U.S.) an ounce on Friday. And investors' outburst of enthusiasm for the sector presents miners with an intriguing dilemma.
Until recently, they swore they had learned important lessons from the previous boom, when gold prices quintupled between 2003 and 2012. Miners failed to turn those enormous gains into lasting value for shareholders, largely because of out-of-control spending and foolish acquisitions.
The big producers vowed to never again get caught up in a spending war. Most said they would focus on patiently reducing debt, selling off non-core assets and slashing costs.
That sounded eminently sensible – until January. The sudden revival of interest in precious metals has cooled the austerity rhetoric. Producers now have a tempting rationale for returning to the far more exciting business of boosting output – if, that is, they're willing to bet on the staying power of this gold rally.
"With improving options, companies are reassessing projects and have started to recommit to formerly deferred growth opportunities," Jorge Beristain of Deutsche Bank wrote in a note this past week.
Those growth opportunities include Kinross's decision in late March to go ahead with an expansion of its Tasiast mine in West Africa, and Goldcorp's acquisition in May of Kaminak Gold Corp., a promising junior miner, for $520-million (Canadian).
In part, the expansion moves reflect a belief that precious metals are destined do well because of shrinking mine supply. David Garofalo, chief executive of Goldcorp, is among those who argue that global production of gold has peaked as new deposits become more and more difficult to find.
Mr. Beristain agrees that "contracting mine supply may provide another tailwind" for gold. He adds that an uncertain global economy provides important support for the metal's price.
Skeptics retort that gold's big run this year has been more about falling interest rates than fading supply or incipient global panic. They say the rally could peter out quickly, especially if fickle investors decide to cash in gains.
Bullion's rise in recent months "has stemmed almost entirely from investor demand" rather than jewellery buying or central bank purchases, according to Helima Croft of RBC Capital Markets. All the new gold bugs who have rushed into the sector could just as suddenly decide to exit, she says.
The industry's sky-high valuations leave it vulnerable to any retreat in the prevailing optimism around precious metals. All four miners trade for 30 or more times their earnings.
Despite his generally upbeat take on the sector, Mr. Beristain of Deutsche Bank has a "sell" recommendation on Goldcorp and "hold" recommendations on Barrick and Kinross. (He doesn't cover Agnico.)
In contrast, Anita Soni of Credit Suisse puts Agnico and Barrick into the "outperform" category, but has "neutral" ratings on Goldcorp and Kinross.
Ian McGugan