Gold producers in tight spot on price

The losing streak of North American gold producers relative to physical gold is expected to continue with first-quarter earnings on tap thanks to higher costs and lower margins, analysts with RBC Capital Markets said in a preview.

Citing year-end guidance for "significant industry-wide increases in operating and capital costs" RBC warned of the potential for negative surprises from Agnico-Eagle Mines Ltd. (AEM/TSX), Barrick Gold Corp. (ABX/TSX), Goldcorp Inc. (G/TSX), Iamgold Corp. (IMG/TSX),JaguarMiningInc. (JAG/TSX) and Osisko Mining Corp. (OSK/TSX) in both higher costs and lower production than expected.

On the other hand, Allied Nevada Gold Corp. (ANV/ Franco-Nevada NYSE AMEX), Corp. (FNV/TSX), New Gold Inc. (NDG/TSX) Yamana and Gold Inc. (YRI/TSX) have the potential to beat expectations for higher production and lower costs than expected.

"Although producers in our universe saw record gross margins in 2011, we believe 2012 margins will be under pressure as industry-wide operating costs increase," the report says.

"Free cash flow could decline as capital spending trends higher, which may limit the ability to return capital to investors."

The key concern is higher operating costs from higher oil prices, wage inflation and lower gold grades.

In 2011, the average total cash costs for tier I and tier II companies in RBC's coverage universe were US$546/ oz and US$688/oz, respectively, up 15% and 30% year over year. In 2012, average cash costs for the tier I and tier II producers have been guided to US$618/oz and US$669/oz, up 13% and down 4%, respectively but RBC sees risk to the upside.