Toronto
Canadian gold miners set for good quarter
Cameron French
RTGAM






Toronto - Canadian gold miners are set to report a sharp jump in fourth-quarter profits thanks to record-setting bullion prices, muted cost increases and recovering prices for base metals.

With gold having hit an all-time high of $1,226.10 (U.S.) an ounce in the final months of 2009, analysts say profits will be driven by a record gap between gold prices and mining costs, despite cost pressure from the weak U.S. dollar.

"We believe that the margins will still increase, and hence earnings will be better," said Paul Burchell, an analyst at Dundee Securities in Toronto.

Top miners Barrick Gold Corp. and Goldcorp Inc. should both see a doubling of underlying profit for the quarter ended Dec. 31 from the year before, according to Thomson Reuters I/B/E/S. No. 3 Canadian miner Kinross Gold Corp. should see underlying profit -- which excludes exceptional items and discontinued operations -- rise 75 percent.

Kinross, Agnico-Eagle Mines and Iamgold Corp. will kick off the gold earnings rush Wednesday.

The expected sharp rise from a year before is largely due to the contrast between metals prices, which plunged late in 2008 when the global economic crises hit hard.

Even gold, usually seen as a safe haven in times of crises, dipped below $800 an ounce during the final months of 2008. The metal currently trades around $1,120.

Metals such as copper and zinc - which factor into results of Barrick, Goldcorp, and mid-tier miners Yamana Gold Inc. and Agnico-Eagle - all but crashed in late 2008, but have since more than doubled as the economy has healed.

Meanwhile, mining expenses have stayed more or less steady over the past year, as fuel costs are well off their pre-crisis highs, while some miners use base metal production as an offset to gold mining costs.

According to National Bank Financial, the margin between average gold prices and average industry cash costs during the fourth quarter was a wide $652 an ounce, up from $504 in the third quarter and $347 in the fourth quarter of 2008.

Dundee's Mr. Burchell said, however, he expects some cost inflation due to the sharp year over year decline of the U.S. dollar - 16 per cent versus the Canadian currency - which helped push up the price of gold, but also raised mining costs at operations outside of the United States.

"It is a currency issue that's driving the price gold largely, and that also drives the costs higher," he said.

He also pointed to a trend toward higher capital costs, which don't affect profits, but eat away at - and sometimes completely consume - cash flows.

Goldcorp said in January, for example, that its 2010 capital costs should be well over $1-billion, while Yamana expects to spend $515-million during the year.

The strong gains in profits will likely not have much of an impact on stock prices, which have largely underperformed the price of gold in the past year, said John Ing, president of Toronto investment dealer Maison Placements.

While the gold price broke through to record levels last October and has since continued higher, gold stocks as a group are still shy of levels hit in early 2008 and roughly flat with levels one year ago.

This has been in part due to surging costs, but also to the billions of dollars in new stock issues in the past year, which serves to dilute share prices in the sector.

"They flood the market, so it takes a long time for it so sort of digest the increase in shares," said Mr. Ing.