Tough Times in the Gold Sector: Will 2014 Be Better for Gold Miners?

What's the outlook for gold miners such as Goldcorp, Kinross Gold, and Agnico-Eagle Mines?

Mar 1, 2014 at 1:20PM

Unfortunately for miners, gold prices at $1,900 per ounce are history. Big drivers for gold prices such as the weak dollar, concerns over Europe's financial problems, China's reduced economic growth numbers, and quantitative easing are either finished or have lost their power. As a consequence, gold dropped 28% last year to around $1,200 per ounce, hitting pretty much every gold-related company there is.

But what's the outlook for 2014? Well, the U.S. government will very likely continue to taper its quantitative easing, and this will probably push some gold ETF investors to sell their ETF holdings and shift to other investment options. On the other hand, the correction in prices could have reached a bottom, and this year we might see a snap back in the opposite direction. 

OK, but how will gold companies perform?
Many gold companies are yet to announce their fourth quarter results, and their third quarter numbers show they have taken a beating. The drivers? Lower average realized gold prices, rising costs, labor issues, strikes, delays, and/or the cancellation of projects. For some companies, it was the whole combo unfortunately. Given the scenario, let's take a look a three gold companies that have issued their fourth quarter and 2013 results to see where they are standing.

First, here's Canada-based Kinross Gold (NYSE:KGC). It is one of the purest gold producers among the senior miners, deriving more than 90% of sales from the yellow metal.

For this company, fourth quarter results are not very encouraging. Although losses narrowed in the quarter, revenues still fell year over year. In fact, its net loss in the quarter hit $740 million. Compared to the prior-quarter net loss of $2.985 billion this seems like a huge improvement, right?

Like most gold producers, Kinross has to face rising operating and capital costs related to poor capital allocation decisions in the past. The production cost per gold equivalent ounce jumped 12% year over year in the quarter. In addition, Kinross is getting lower grades across the mines and has to face higher maintenance costs. Hence, going forward, cost control remains a key priority for the company.

However, Kinross holds interesting assets, like its Tasiast mine, a 15 million ounce world-class gold deposit located in Mauritania. This project is developing well, and the company is preparing for the next two phases of expansion in the area, which should add 30,000 tons per day of capacity.

Lower costs
Second, here's Agnico-Eagle Mines (NYSE:AEM), a mid-tier gold miner that operates six mines in Canada, Mexico, and Finland.

Despite posting record fourth quarter production, Agnico showed a net loss of $453.3 million in the quarter. For a second straight year, the company has reported record annual gold production, helping drive costs lower. In fact, in the quarter, Agnico showed payable gold production of 322,443 ounces at a total cash cost of $623 per ounce. However, let's not get too excited, as for the full year 2013 the company recorded a net loss of $406.5 million. 

Rapid growth and production increases have always been good characteristics of Agnico. In fact, its gold output increased from roughly 230,000 ounces in 2007 to just under 1.1 million ounces in 2013. In addition, it maintains enough cash flow to continue backing its exploration budget, and reinvesting in its assets to expand output. Plus, all of the company's producing assets are in the relatively stable and mining-friendly countries of Canada, Finland, and Mexico.

Its flagship polymetallic mine LaRonde, located in Quebec, is very rich in metal content. In fact, it has helped the mine generate a steady gold output at very low costs on a byproduct cost basis. This mine still holds significant gold reserves, and Agnico is working on extending mining shafts further underground. One cool thing about this mine is that its higher gold grades located deeper more than offset the greater depth, hence it lowers costs while increasing output. Plus, Agnico also operates a smaller gold mine located close to LaRonde, and this saves costs by leveraging drilling equipment, personnel, and milling capacity over both mines.

Looking for expansion
Finally, here's a senior gold mining company with operations in Canada, and other safe jurisdictions in the Americas, Vancouver-based Goldcorp (NYSE:GG).

The company could be an exception within the industry, as it had a good performance in the fourth quarter and delivered solid results for 2013. Production in fact reached 2.7 million ounces at all-in sustaining cost, or AISC, of $1,031 per ounce. Not bad at all.

Last month, Goldcorp announced its plans to acquire Osisko Mining for about $2.4 billion. But, Osisko's management considered the price too low and recommended its shareholders reject the offer. As a result, Goldcorp pushed back the original offer deadline to March 10. If this deal goes through and the company completes construction of key growth projects at Cerro Negro, Eleonore, and Cochenour over the next 18 months, Goldcorp would become the largest gold producer in Eastern Canada.

The company also holds a high-grade, low-cost, long-life mine, Red Lake, which works as a continuous source of ample cash flows. Since it doesn't have a high cost structure and will increase production this year, the stock could be interesting.

Final thoughts
The positive sentiment in equity markets seems likely to lure investors from 'safe haven' investments like gold for the time being. However, if prices continue to go down, eventually the opportunity and increased demand will push prices back up. For now, the outlook is uncertain.

Kinross is extremely exposed to gold price fluctuations, as 90% of its production is related to this metal. Pay attention to the capacity increases and the evolution of costs.

Agnico is expanding rapidly at lower costs, and this is not a bad sign at all. However, it would be nice to see profits in 2014. Keep an eye on results. 

For Goldcorp, it is important to wait and see what happens with its Osisko deal, since it could alter the company's valuation. Nonetheless, the company is highly exposed to gold price volatility and currency risks.

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Louie Grint has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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