Gold, which is a “safe haven” and usually rallies in times of geopolitical tension, has rallied almost 5% since the beginning of 2017, as political tensions, financial risks, and uncertainty continue to intensify.
In late 2011, gold prices peaked at close to $1,900 per ounce, then retreated steadily to levels of just over $1,000 per ounce at the end of 2015 and are currently closing in on $1,300 per ounce. There are certainly many questions that remain with respect to where gold is going from here, but one thing is sure: the industry has suffered through a period of record production and declining demand and, in response, has worked hard at reducing costs and improving balance sheets. This leaves gold producers well positioned to reap the rewards of rising gold prices.
So, if you believe that rates will stay low for longer, that the economy is on shaky grounds, and that heightened geopolitical risk is here to stay, at least for the medium term, then it may be wise to turn to gold for its safe-haven qualities.
In its first quarter of 2017, Agnico reported a 1.7% year-over-year production increase to 418,216 ounces and posted an impressive 10.9% improvement in its all-in sustaining costs (AISC) per ounce. Going forward, things are still looking good, as management again increased its production guidance for 2017 to 1.57 million ounces. While this is down from the company’s 2016 production of 1.66 million ounces, management expects that new mines and development will bring production to two million ounces in 2020.
Also, importantly, the company is achieving a best-in-class operating structure with AISC of $741 per ounce. And based on how things have been going so far this year, it looks like management’s AISC guidance of $850-900 per ounce will prove to be too conservative. This compares to Kinross Gold Corporation’s (TSX:K)(NYSE:KGC) AISC of over $1,000 per ounce and Goldcorp Inc.’s (TSX:G)(NYSE:GG) AISC of $800 per ounce.
Lastly, and worth noting, is the fact that Agnico Eagle has shored up its balance sheet and currently has a debt-to-capitalization ratio of 21.2% with net debt of $465 million and $804 million of cash on the balance sheet. Goldcorp has a 17% debt-to-capitalization ratio, and Kinross has a 29% debt-to-capitalization ratio.
The bottom line is that the fate of gold prices is really dependent on many factors, including the health of the global economy, physical demand, and production levels of the metal. But at least at the company level we have seen a renewed focus on improving efficiencies and cost structures, and Agnico Eagle stands out in this respect.
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Fool contributor Karen Thomas has no position in any stocks mentioned.