October 26, 2009 / 11:37 AM / 8 years ago

Quarter's fine print to set fate of gold stocks

4 Min Read

TORONTO (Reuters) - Strong gold prices and tame cost inflation should lead to robust third-quarter results from Canadian gold producers, but investor focus will likely be on updates on new mines and fresh details on the unwinding of Barrick Gold's hedge book.

Reports will kick off on Wednesday with a results from Agnico-Eagle, one of several miners set to show a stronger profit due to a year-over-year rise in gold prices, and a recent rebound in prices for base metals byproducts that many -- including Agnico -- mine along with the gold.

Driven by fears of inflation and a sinking U.S. dollar, gold averaged $961 an ounce during the three months ended September 30.

That's up about 10 percent from the third quarter of 2008, and comes as prices for key inputs such as oil -- which hit a record high in the third quarter of 2008 -- and chemicals such as acid and cyanide have come down.

"It's the best of all worlds for the gold miners," said John Ing, president of Toronto investment dealer Maison Placements.

"It should be a good quarter for them ... and costs should be flat year-over-year because we didn't have the big energy cost that hurt last year."

Gold ended the quarter at just over $1,000 an ounce and a bit shy of record levels, but it has since smashed through the previous record around $1,030 an ounce, and was above $1,050 an ounce on Friday.

Details Key for Stocks

Stock prices have largely keyed off the metal's price, and some investors have already started to look ahead to what promises to be even richer fourth-quarter results, analysts say.

"We expect the (third-quarter) earnings season to be a neutral event, with share prices driven by operating performance and underlying commodity price moves," UBS analyst Brian MacArthur said in a research note this week.

That means price moves during third-quarter reporting period will likely come from updates on ramp-ups of new mines that are key to companies' future production, such as Agnico's Kittila mine in Finland, Barrick's Buzwagi mine in Tanzania, and Kinross Gold's Paracatu mine in Brazil.

Even more importantly, Barrick will update investors on progress in buying back 3 million ounces in fixed-price gold hedges, or forward sales, which it entered into years ago as a means to protect itself against a falling gold price.

Barrick said in early September it would close out the hedges, and also buy back some of its floating-price hedges. The company said at the time it had already been buying gold on the open market to fill the contracts.

Analysts have wondered how much of the recent gold rally has reflected Barrick's purchases, and details on how many ounces remain to be repurchased could have a notable impact on the metal's price.

"If Barrick were to come out and to say that they're finished, that they've bought back the 3 million ounces, that might be a disappointing sign to the market," said Paul Burchell, a mining analyst at Dundee Securities.

Net Loss for Barrick, but Strong Core Results

Barrick is taking a $5.6 billion charge during the quarter due the decision to buy back the hedges, which will send it to a multibillion-dollar quarterly loss.

Stripping out items, the miner is expected to report profit of $633 million, up 20 percent from the year before, according to Thomson Reuters I/B/E/S.

Top-tier rivals Goldcorp and Kinross are expected to report profit increases of 124 percent and 30 percent, respectively, with Goldcorp's expected huge gain partly due to a disappointing year-earlier quarter, when the company suffered from low grades and production delays.

Per-share profit gains will suffer from dilution due to billions in stock that has been issued this year by gold producers.

Barrick issued $4 billion to pay for buying back its hedges, while Kinross raised $415 million in January. Other companies such as Agnico, Yamana Gold and Osisko Mining also sold stock this year.

($1=$1.05 Canadian)

Reporting by Cameron French; Editing by Frank McGurty

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