After the Federal Reserve increased its benchmark interest rate by 0.25 points for the second time in the last three months, gold opened at $1,225.60 per ounce on the London Bullion Market this morning, up $26.8 per troy ounce or 2.23% from the previous close of $1,198.80 per troy ounce.
In response to rising gold prices, which are also backed by the results of the Dutch elections, all gold stocks trading on the New York Stock Exchange are soaring with Yamana Gold (AUY, Financial) leading the group.
Source: Google Finance
Yamana Gold increased by 13.25%,Ă‚ Agnico Eagle Mines (AEM, Financial) by 6.45%, Eldorado Gold Corp. (EGO, Financial) by 10.49%, Newmont Mining Corp. (NEM, Financial) by 2.58%, Kinross Gold Corp. (KGC, Financial) by 8.96% and Barrick Gold Corp. (ABX, Financial) by 4.38%, according to the most recent market prices.
How will rising gold prices impact mining companies' first-quarter profits?
While the current quarter is not yet closed, gold is going to end the period at a price per troy ounce well above $1,210, substantially higher compared to the same quarter a year ago.
With the precious metal closing the first quarter of 2017 likely at $1,220.00 to $1,230.00, the gold mining companies are positioned to take advantage of rising prices and beat analysts’ expectations on first-quarter 2017 earnings. It was at the end of the first quarter of 2016, when nearly all the gold stocks exceeded analysts’ expectations on first-quarter 2016 earnings, as you can see in the picture below.
How much the gold mining companies will exceed analysts’ expectations depends not only on the price of gold but also on the price that each company has taken as assumption for the determination of its proven and probable gold reserves. That represents the minimum price at which the company can mine at profit.
The lowest is the assumed gold price per ounce, highest are the chances that the company can close the first quarter with a huge profit, with positive repercussions on the market value of the stock.
In the gold stock industry, Barrick Gold has defined its reserves at a gold price of $1,000 per ounce, the lowest in the industry, followed by Agnico Eagle Mines with a gold price of $1,100 per ounce.
I would also consider Newmont Mining a good bet in the gold stock industry even though the U.S. miner has defined its reserves based on a gold price of $1,200 per ounce. The largest gold producer in the U.S. has successfully brought into production its gold projects at Tanami, Merian, Carlin and Kalgoorlie, adding a consistent amount of gold ounces to its total production, lowering the overall cost and enhancing the average grade of its reserves. The latter will be another important key factor in the improvement of Newmont’s economics. It will give more flexibility to the company in deciding the future production levels, which will be less dependent on the gold price.
Disclosure: I have no positions in any stock mentioned in this article.
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