How The Three Major Gold Companies Performed so far
For a while now, the gold industry has not been performing well, at least for the big names producers. Some would even say big mining companies have been having a worse time of it than small producers. This is because of the bull market that has been going since January 2016. In 2018, things seemed to be turning, especially in the third quarter. The big gold miners are definitely now outperforming junior gold miners.
There are three particular gold miners that have shown great strides. These mining companies are Barrick, GoldCorp and Newmont. These companies have just published their third quarter report for 2018. To understand, how these companies came to be where they are at this point we would have to track it back to 2016.
At first, revenue dropped 9.4% in the third quarter of 2018 when compared to the third quarter of 2017. The big companies have been following a particular pattern because of low reserves and fire asset sales that were made during the last bear market in the precious market sector. This sector has been producing lower amounts. This reduction in production has had a negative effect on the sales volume. This applies to all three gold mining companies. The three companies sold only 10 million ounces of gold in the first three quarters which is a 11.3% reduction compared to what they sold around the same period in 2017. This drop in sales was mitigated by strong gold prices which have gone up from $1,251/oz in Q3 2017 to $1,278/oz in Q3 2018. This year, production has improved. The direct cost of production (defined as direct production cost / equivalent gold sold) over the last three quarters averaged $674 an ounce in 2018 compared to $610 in 2017 around the same time. A high cost of production would have had a negative impact on the gross margin delivered by the sector in 2017 it was $4.2 billion but it dropped to $3.3 billion in 2018. Interestingly the three companies increased their administrative expenses from $469 million in 2017 to $494 million in 2018. Barrick and Newmont increased their administrative expenses more than Goldcorp.
Overall, the high costs of mining and low sales volumes, the gold mining sector reported a low operating profit than previous years.
Now let’s look at the economics of gold mining or how mining companies perform at different prices of gold.
Gold prices
The three companies were selling their gold at $1,278 an ounce at quarter 3 of 2018. This was slightly higher than what they were selling it for at Q3 of 2017.
Unit direct cost of production
The direct cost of production increased from $610/oz in 2017to $674/oz in 2018.
Gross margin
The gross margin reported in Q3 of 2018 was low despite the rising gold prices.
Cash flow
The three major mining companies reported a lower cash flow than they did in 2017. The miners were able to deliver comparable cash flow at low gold prices.
Net debt
Tracking the gold sector over three years (from 2016 – 2018), the sector has cut its net debt quite significantly. However in 2018, the sector has close to zero cash flow reducing the ability to cut their debt more.
All in all, the big three mining companies have done well despite production deteriorating and margins shrinking. 2018 was not exactly as bad as it could have been because the direct cost of production went down and the price of gold was actually high. The three gild mining companies, Barrick, GoldCorp and Newmont could do better. They are still underperforming when compared to junior gold miners in the long term but in the short term, they are doing pretty well.
Sources:
- https://www.streetwisereports.com/article/2019/01/16/goldcorp-newmont-deal-points-to-more-m-a.html
- https://www.barrick.com/news/news-details/2019/barrick-reports-2018-full-year-and-fourth-quarter-results/default.aspx