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Thanks to lower costs, better management and more favourable currency markets, Canadian gold companies are better positioned to benefit from record high bullion prices than a decade ago, the last time the commodity was in an extended bull run.

Last week, the price of gold hit an all-time high, surging far past the previous record of US$1,920 an ounce in 2011. Gold has been one of the world’s best-performing asset classes this year because of unprecedented COVID-19-induced stock market volatility. Historically, investors have sought refuge in the metal during times of great uncertainty. On Friday, gold futures closed at US$2,046 an ounce.

With a white hot commodity price in place, the next few months are expected to be among the most profitable periods ever for Canadian gold producers.

“There’s a dramatic amount of cash that’s going to be generated in this industry,” said Sean Boyd, chief executive officer of Agnico Eagle Mines Ltd., Canada’s second-biggest gold company by stock market value. “Some of the biggest cash amounts in decades.”

The previous time gold hit record highs, the dynamic was very different. From 2008 to 2011, profit margins at gold companies didn’t expand much, and in some cases actually fell. That was partly because of cost inflation on fuel, labour and materials.

“One major difference is the fact that we’re not seeing the input price pressures we saw 12 years ago across the board,” Mr. Boyd said.

For example, in 2008, crude oil hit a record high of US$147 a barrel, inflicting intense cost pressure on gold producers. By contrast, earlier this year, the spot price of crude hit a record low of minus US$37 a barrel. Oil has since rebounded to around US$42, but it’s still dramatically lower than a decade ago.

Gold companies are not facing the same level of competition for labour and materials, either, because fewer large mines are being built across the global mining sector compared with 10 years ago. At that time, many other commodities, including coal, copper, uranium and rare earth metals were booming. This time around, gold is one of the few outliers.

Gold producers with large operations in Canada are also likely to see a bump in their earnings because of the weaker Canadian dollar. Bullion is priced in U.S. dollars, so miners generally report their earnings in the currency. Companies such as Agnico, Kirkland Lake Gold Ltd. and Alamos Gold Inc., which incur a good chunk of their costs in Canadian dollars, should be better off financially compared with a decade ago, when the loonie was trading near parity with the greenback.

“The devaluation of resource currencies has lowered mining costs,” said John Tumazos, CEO of Very Independent Research. Companies with operations in Australia and Brazil have also benefited from this dynamic due to the weakening of the Australian dollar and Brazilian real.

The Canadian gold industry is also much better managed now than 10 years ago. From 2007 to 2012, several of the industry’s biggest players, including Barrick Gold Corp., Kinross Gold Corp. and Goldcorp Inc. paid astronomical sums for acquisitions at cash premiums that proved disastrous. The current round of M&A, which kicked off with Barrick’s acquisition of Randgold Resources Ltd. in late 2018, has featured either no, or low, stock premium deals. As a result, the balance sheets of major gold miners are in better shape.

“Management groups and companies learned lessons after the crazy times when gold was hitting highs ten years ago,” said Clive Johnson, CEO of B2Gold Corp.

“Billions of dollars [were] lost. Not because of the gold price, much more because of bad management, frankly. Poor acquisitions, overpaying and then poor execution in many cases,” he said.

The caution and conservatism also applies to new mines companies are choosing to put into production. “Companies are not undertaking as difficult a class of projects,” said Mr. Tumazos. “And they’re not giving the keys to the contractors.”

He cited Barrick mismanagement of the Pascua-Lama project in South America, which the company largely outsourced to contractors, as a prime example. Barrick sank about US$8-billion into the project, only to eventually abandon it after running into technical and environmental roadblocks. In recent years, Barrick has been much more disciplined, and current CEO Mark Bristow is considered to be one of the best managers in the industry.

The one glaring weak spot for the gold industry versus a decade ago is reserves. There have been no new significant discoveries in decades. And while Kirkland Lake was the world’s hottest stock for a few years thanks to its extremely high grade discovery at the Fosterville mine in Australia, the amount of new gold at the site was relatively small compared with megadiscoveries of the past. Barrick’s fabulous Goldstrike mine in Nevada was discovered in the 1980s, and is still in production today after producing about 50 million ounces of gold.

“Reserve replacement is the central problem for gold producers,” John Ing, analyst with Maison Placements wrote in a note to clients this week.

“The problem is not geology, nor even demand, but lack of investment,” he wrote. After gold went into an extended bear market in late 2011, the industry slashed expenditures on exploration.

Now that the industry is generating lots of free cash flow again, meaningful amounts of money are expected to be dedicated to exploration.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 12/06/24 1:26pm EDT.

SymbolName% changeLast
Agnico Eagle Mines Ltd
Agnico-Eagle Mines Ltd
Barrick Gold Corp
Barrick Gold Corp
Alamos Gold Inc Cls A
Alamos Gold Inc
B2Gold Corp

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