Record quarterly gold price of $1,911/oz – The Q3/20 gold price averaged $1,911/oz, its best quarter ever and up 12% q/q and 30% y/y, which should drive strong second quarter earnings and cash flow, particularly with production improving post Q2/20 COVID-19 disruptions. The silver price averaged $24.36/oz in Q3, up a massive 49% q/q. The gold/silver ratio has receded to 79 from a multi-decade high of 124 set in mid-March. Base metal prices were also stronger across the board with copper averaging $2.96/lb, up 22%, and zinc and lead up 19% and 12%, respectively. WTI oil rose 46% to average $41/bbl in Q3/20 but is still down 27% y/y.

COVID-19 production rebound. With mines largely back to normal operating levels following Q1-Q2 COVID-19-related disruptions, we expect production to pick up significantly in Q3 for a number of producers. In aggregate, we expect a 19% q/q increase in gold production with more than half of producers showing >20% q/q increases (Figure 4). While COVID-19 is currently undergoing a second wave in many countries, we expect mining to largely continue as an essential service with protocols in place to manage testing, logistics, and personnel.

Poised for record AISC margins and FCF. On largely stable costs, we forecast a record AISC margin in 2020 of $737/oz, well above the previous record of $524/oz in 2011 and roughly double the $371/oz in 2019, and increasing to $946/oz in 2021. We also expect record FCF generation; for the top 6 producers we show quarterly FCF should be roughly double y/y. Similarly, we forecast 2020 aggregate FCF of ~$13 billion for precious metal companies in our coverage universe, more than double 2019 levels and forecast to reach ~$19 billion in 2021. We estimate average FCF yields for producers at ~10%, which we view as attractive. We also expect the industry to largely be in a net cash position in 2021.

We continue to be bullish on gold. We note that inflation expectations, gold, and gold equities have largely traded sideways since the end of August. We suspect the pause could be partially due to the Fed being on hold from further action so as not to be seen as “interfering” this late ahead of the upcoming US election amid the continued impasse on further fiscal stimulus and a second wave of COVID-19. We believe the Fed will ultimately step in to provide more accommodation to support inflation expectations. We believe the current macro environment continues to be supportive of the gold price with ultra-low (and negative real) interest rates, fiscal and monetary stimulus, slow growth, rising debt levels and elevated macro uncertainty. With $64 trillion in global debt yielding <1%, we believe gold provides a hedge against return-free risk.

Changes to estimates, targets and ratings – We have made minor changes to our forward-curve derived price deck with 1-2% lower gold prices across the curve. Our new LT gold price assumption is $1,984/oz ($2,015/oz previously). Our silver price deck has also decreased slightly with a new LT silver price of $25.31/oz ($25.83/oz previously). We have lowered Pretium Resources to HOLD from Spec Buy on valuation; our other ratings are unchanged.
CG precious metal top picks:
• Seniors: Kinross, B2Gold, Centerra Gold
• Intermediate/Juniors: Equinox Gold, Teranga Gold, K92 Mining, Calibre Mining, SSR Mining

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