BMO Capital Markets warns miners should prepare for a “prolonged period of sub-US$1,200/oz gold prices.”
As a result, “many of the gold producer equities will struggle, especially those with higher cash costs and/or high debt loads,” cautioned BMO Nesbitt Burns analyst Jessica Fung in a report issued October 7th.
“Gold, silver and platinum prices remain under considerable pressure due to expectations for the U.S. dollar to continue strengthening,” Fung advised.
BMO has lowered 2015-16E gold prices from $1,275 to $1,190 in 2015 and from $1,250 to $1,238 in 2016 to reflect recent price performance, adding “BMO Research does not expect any upset for gold from current levels until H2/16E based on U.S. dollar forecasts.”
In her analysis, Fung observed that at gold prices of $1,200/oz, “nearly 40% of gold production is loss-making on an All-in Cost (AIC) basis. Further, given BMO Research covers some of the larger and better-cost operators, on a global basis it is possible well over half of gold production is unprofitable at current gold prices.”
Nevertheless, BMO Research forecasts rising gold mine supply through 2018E, “despite operating in a lower price environment. Ongoing efforts to cut costs and revise mine plans are much preferred to curtailing operations.”
“Consumer demand for gold, particularly the ‘shift from west to east’ makes great headlines, but does not impact the gold price, in BMO Research’s view,” observed Fung.
BMO prefers gold producers with younger mines, “since younger mines frequently have more flexibility to adjust mine plans to a higher grade. Higher grade portions of older mines are generally mined out.”
Gold mining names preferred by BMO Research include: Randgold, Alamos Gold, Franco-Nevada, Goldcorp, and Dalradian.
Silver price forecasts have been revised down by BMO Research “in light of recent price performance and ‘in sympathy’ with gold prices. BMO Research expects silver prices to average US$17.50/oz in 2015E … moving up to US$19.50/oz in 2016E in a weaker environment.” Previously, BMO forecast a 2015E silver price of $20.25.
Mined silver supply growth through 2019E is anticipated by BMO Research. “Much of this growth is, like existing production, a result of by-product output from gold, copper and zinc mines. In addition, BMO notes that zinc smelters in China are increasingly capable of processing silver from zinc concentrates, providing upside risk to BMO Research’s supply expectations.”
Meanwhile, the industrial demand for silver remains at relatively low levels, Fung noted.
BMO Research prefers to view platinum price performance in rand terms, “which has reflected market fundamentals more so than in U.S. dollar terms.”
“A relatively tight market for platinum” is anticipated over the medium term, “though not undersupplied liked platinum,” observed BMO Research. “BMO continues to expect platinum prices to improve in rand terms, but given expectations for a still-weakening rand through 2016E, platinum prices are forecast to be rather rangebound in the USD.”
BMO platinum price forecasts for 2015E have been revised from $1,500 to $1,413 per ounce, while 2016E price has been revised from $1,550 to $1,425 per ounce.
BMO Research has increased palladium price forecasts to reflect an expected deficit market over years, with the long-term price increased from US$850/oz to $950/oz.
Palladium continues to be preferred to platinum due to greater demand leverage to auto production in the key growth regions of China and the U.S., said BMO.
However, Fung warned that Norilsk’s proposed purchase of US$2 billion worth of palladium from Russia’s palladium inventories “is a near-term downside risk.”
BMO estimates that US$2 billion is equivalent to 2.2-2.5 million ounces of palladium.
“It remains unclear if Norilsk would sell this palladium into the market as demand requires, which would effectively close the supply gap through 2016E and could take palladium prices down significantly, or exert some discipline to support palladium prices,” Fung advised.