Analysts expect gold miners to report improved profit margins by the fourth quarter of 2023, as the increased labor and energy costs finally recover from the profit-denting levels of 2022. All-in sustaining costs is an industry term that refers to the total funds used on gold mining business expenses. Last quarter, Barrick Gold Corp. and Newmont Corp. reported all-in sustaining costs jumping by approximately one-third before showing signs of falling.
Barrick Gold Corp. is one of the world’s largest gold producers, with over 16 operating sites in Argentina, Canada, the Ivory Coast, the Dominican Republic, Mali, the Dominican Republic of Congo, Papua New Guinea, Tanzania, the United States, Chile, Saudi Arabia, and Zambia. Newmont Corp. is the largest gold producer in the world, headquartered in Colorado and controlling mines in Nevada, Colorado, Quebec, Ontario, Mexico, Australia, the Dominican Republic, Ghana, Peru, Argentina, and Suriname. Minor variations in all-in sustaining costs between these two major gold producers create enormous rippling effects throughout the gold industry, influencing supply, demand, and prices.
“Costs on the gold side are down a little bit, so we should see better margins in Q4,” explains Carey MacRury, an analyst from Canaccord Genuity, a full-service investment and financial firm. “So, it’s really just higher production, slightly lower cost, and the flat gold price.” MacRury goes on further to say that he expects prices to dip by October to December of 2023 compared to 2022’s ending period.
In 2022, miners dealt with disruptions from COVID-19, severe wet weather challenges, labor shortages partially related to the pandemic, and supply chain complications. Analysts from Bernstein believe that the labor supply landscape for 2023 looks more promising. While sites may not be able to avoid weather complications or unforeseen supply chain issues, labor shortage costs shouldn’t be as big of a hit.
To understand production rates and costs, you must know the context. Why are people buying gold, and why does the demand fluctuate?
Investors consider gold a safe haven during poor economic periods, especially with high inflation rates. Gold (and other precious metals) typically continues performing well while all other asset classes plummet with the failing economy. Because of its consistency and strength, investors use gold to protect their purchase power as inflation rises.
In February 2022, gold reached a relatively high point of $2,000 per ounce immediately after the Russian-Ukraine invasion. Conflicts in Russia and Ukraine created rippling effects throughout global economies as many central banks increased their gold reserves to join the de-dollarization movement. Data from the World Gold Council shows that central banks purchased 1,136 tons of precious metals in total during 2022, marking the largest purchase total since 1967.
After this initial purchase frenzy, gold prices gradually dropped by 21% over the next eight months as the Federal Reserve increased interest rates in an attempt to control inflation. “Most of the damage (from increasing interest rate) was done in 2022,” MacRury adds, explaining that he expects higher gold prices in 2023 with the margin expansion.
Over the last three years, Barrick Gold Corp. has steadily produced less and less gold. The company expects better production rates in 2023, particularly from its Nevada mines, a joint project with Newmont Corp.
The year-end report from Barrick Gold Corp. already shows production increases in the works. The company produced 4.14 million ounces of gold in 2022, 1% below the previously guided 4.2 million ounces. Production in the fourth quarter, though, was 13% higher than the third quarter, with 1.11 million ounces of gold, offsetting the low figures from the beginning of the year.
Newmont will release its quarter four results and official 2023 trajectory on February 23. Official reports from the first three quarters of 2022 align with everything discussed thus far.
“Supply chain issues are fixable to a certain extent, but if social unrest persists or the Ukraine war escalates further, then the miners may struggle to meet guidance,” Bernstein explains.
Dozens of factors impact the supply chain and the resulting gold prices. Analysts expect gold prices to continue rising throughout 2023 as the Federal Reserve attempts to combat inflation with little-to-no results. If gold miners can return to normal production rates with healthy margins as expected by the end of 2023, gold prices may level entering next year.
Many investors consider now a good time to buy gold before prices increase and level out. As always, you should consult a financial advisor about your investing strategy before making any final decisions.
