Now the mining sector’s quarterly season is beginning and the optimism of many investors and analysts is high. The high expectations for the figures of the mining companies for the third quarter are mainly based on an almost 20% increase in the gold price in the summer, explains BMO Capital.
The analysts stated in a recent report that they expect the earnings per share of the gold companies they observe to rise by 110% compared to the previous quarter. Royalty and streaming companies are predicting a 65% increase in earnings. According to analysts, investors can look forward to further gains by the end of the year.
BMO points out that gold and silver prices in the first and second quarters were largely in a narrow range, averaging USD 1,300 per ounce of gold and USD 15.25 per ounce of silver. In the third quarter, the price of gold had risen 12% and the price of silver 14%, so an ounce cost an average of $1,472 per ounce of gold and $16.98 per ounce of silver on average. Assuming that the US Federal Reserve will continue to cut interest rates, and that gold and silver will therefore continue to rise, analysts are forecasting a 167% rise in earnings in the second half of the year for the gold producers they cover and a 67% rise in royalties and streaming companies.
Higher margins, higher cash flow
BMO not only expects excellent profits from the mining companies, but also expects cash flow to increase in the summer due to higher margins. Analysts expect free cash flow at gold producers to increase by 74% compared to the second quarter (37% at royalty companies). For the companies monitored by BMO, the experts expect an average increase in free cash flow of 145% in the third quarter and 260% compared to the first and second half of 2019, based on their gold and silver price forecasts.
The analysts also pointed out that the CEOs’ statements on further developments were particularly important for investors. They stressed that it was now crucial what the companies would spend the unexpectedly high profits on. In BMO’s view, it is important that CEOs take a disciplined approach in their statements, stick to cost-cutting measures and do not return to past behavior.