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BMO: Gold Miners ‘Far More Prepared’ For Lower Prices Than Market Thinks

(Kitco News) - Gold-mining companies are “far more prepared” for lower prices than the markets may perceive, says BMO Capital Markets.

Gold has fallen considerably since its record high around $1,921 an ounce back in September 2011, prompting concerns about the profitability of mining companies since lower prices mean lower revenues. As of 11:13 a.m. EDT, spot metal was slight more than $1,154 an ounce.

BMO analysts said Monday that “we remain constructive” on precious-metals prices through the second half of 2015, but optimism for a rebound has been tarnished some due to expectations for a rate hike by the U.S. Federal Reserve. Against this backdrop, “we felt it best to have a discussion on whether the precious-metals miners are prepared.”

Analysts have studied the progress the sector has made in reducing costs over the last two years.

“Our view is that the precious-metal miners as a group are far more prepared for lower gold and silver prices than the market perceives,” BMO said. “However, the stark reality is that some precious-metal miners are better prepared than others to weather lower metal prices.”

In particular, analysts looked at free cash flow (FCF) breakeven levels.

“The analysis of FCF breakeven price suggests that 50% of the gold miners generate free cash flow below $1,150/oz gold with an average FCF breakeven gold price of US$1,135/oz for 2016E,” BMO said. “Excluding dividends, the FCF breakeven gold price for the miners declines to $1,070/oz in 2016E.

“Companies with the lowest FCF breakeven gold price include Randgold (GOLD-LSE), Lakeshore Gold (LSG-TSX), Tahoe (THO-TSX) and Primero (P-TSX).”

Over the next five years, the outlook for the gold miners looks to be more positive with 86% of the miners expected to achieve a FCF breakeven gold price below spot gold, BMO reported.

Silver miners may be “less prepared,” however, after enduring a deeper correction in the price of silver relative to gold, BMO said. Three out of 11 companies report FCF breakeven costs for 2016 that are estimated below $15 an ounce, BMO said.

However, BMO said, the prospects for the silver miners appear to improve over time with 50% of silver miners achieving FCF breakeven silver prices below spot silver over the 2016-2020 time frame.

By Allen Sykora of Kitco News;



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