(Kitco News) - Gold's historic surge past $3,000 an ounce in Q2 has supercharged the mining sector, setting the stage for record-breaking profit margins this earnings season, according to one investment banking firm.
In their second-quarter earnings preview, analysts at Stifel Financial Corp. said they are forecasting a Q2 average all-in sustaining cost (AISC) margin of about $1,740 an ounce for senior gold producers and $1,535 an ounce for mid-tier producers. This represents a quarterly increase of 28% and 20%, respectively.
"Inflationary factors on unit costs, while volatile and subject to uncertainty due to tariff pressures, have largely stabilized in the range of +5–10% year-over-year," the analysts said. "The most notable increases have been in contractor costs (labor), as well as in royalties and taxes, which are positively correlated with higher gold prices. Notably, lower fuel prices—due to a quarter-over-quarter decline in WTI—should serve as a tailwind for costs."
Although mining companies have experienced rising costs, these have been outpaced by the unprecedented rally in gold, which saw an average price increase of more than $400 during the second quarter. With profit margins expected to hit record levels, Stifel noted that investors should also anticipate robust free cash flow (FCF).
"A general improvement in free cash flow yield can be attributed to higher gold prices, general cost containment, productivity gains, and the completion of recent mine construction projects. Based on revised gold and silver price estimates, we project our top five senior gold producers will show 2025 and 2026 FCF yields of 6.2% and 6.7%, respectively, while intermediate gold producers are forecast to yield 6.3% and 10% for the same years," the analysts said.
Regarding what producers will do with their growing cash reserves, Stifel said that investors should expect announcements of further share buyback programs.
"Capital allocation priorities remain geared toward organic pipeline growth and the return of excess cash through share buybacks," the analysts said.
Stifel's comments come as investors are finally turning their attention to the precious metals equity space, with undervalued mining companies outperforming gold since April. Ahead of earnings season, the analysts stated that intermediate gold producers are the most attractive segment in the mining sector.
They explained that intermediate gold equities are currently trading at an 18% discount compared to senior gold producers, while mid-tier equities are trading at a 30% discount.
"We believe well-capitalized, growth-oriented mid-tier gold (0.1–0.5 Moz/year) and intermediate (0.5–2.0 Moz/year) gold equities are best positioned and offer the most compelling risk-reward valuation trade-off, given their leverage to higher gold prices, upside in reserve life, exploration catalysts, and M&A re-rating potential," the analysts said.
Looking ahead, Stifel expects the mining sector to maintain elevated margins as gold prices remain well-supported through 2027. The analysts now see the gold price averaging around $3,200/oz in 2025 and 2026, up from previous estimates of $3,000/oz and $3,100/oz, respectively.
"We see the gold price preparing to re-engage higher," the analysts said. "Our incrementally constructive outlook is driven by three key factors: (1) central bank buying and supportive ETF flows reflecting increased investment demand for safe-haven assets; (2) asset diversification, with gold increasingly viewed as a strategic asset in portfolio allocation; and (3) a heightened geopolitical risk premium, resulting from market volatility and fragmentation in regional economic and financial markets."
Stifel's top equity picks for the year include: Agnico Eagle Mines Ltd. (AEM), Alamos Gold Inc. (AGI), Kinross Gold Corporation (KGC), Orla Mining Ltd. (ORLA), Osisko Development Corp. (ODV), Prime Mining Corp. (PRYM.V), Southern Cross Gold Ltd. (SXG.AX), and Wesdome Gold Mines Ltd. (WDO.TO).
In the silver space, their top pick is Aya Gold & Silver Inc. (AYA.TO), and the firm's top royalty and streaming picks are Wheaton Precious Metals Corp. (WPM) and Osisko Gold Royalties Ltd. (OR.TO).
