Record margins and no leverage left to pay down mean the next phase of this bull market is acquisition, the Gold Newsletter editor tells Kitco News
The biggest gold miners on earth are making more money than they know what to do with. They've paid off the debt. They've raised the dividend. They've bought back the stock. And they're still swimming in cash.
Brien Lundin thinks he knows where it goes next.
"The big producers are making so much money that they have no debt on a net basis," the editor of Gold Newsletter told Kitco News. "They can only dividend so much money out. They can only buy so much stock. At some point they're going to have to rebuild the pipeline."
In other words, they're going shopping.
"I think that's going to be the next big phase of this bull market, when we see the majors start to buy those big projects."
The math supports him. The World Gold Council put the average all-in sustaining cost margin at $3,076 an ounce in the first quarter, a record, and up 134% in a year. Gold traded at $4,390.60 Tuesday, down $14.50 after touching $4,443.90 earlier in the session. It set a record of $5,597 back in January.
But the part that makes this a trade rather than a curiosity is who hasn't moved yet.
"Everything up and down the food chain, the producers, the developers, have moved except really for the explorers," Lundin said. "Right now the explorers offer tremendous upside, because they are going to be the last to move."
So the majors need projects they can't generate fast enough on their own, and the explorers are sitting on projects at roughly pre-rally prices. The gap between those two things is the story of the next year.
Why he wants costs to go up
Production costs keep climbing. All-in sustaining costs (AISC) hit $1,785 an ounce in the first quarter, the 28th straight quarter of year-over-year increases.
Lundin wants them higher.
"One of the things I'm looking for is for AISC, the cost of production, to actually increase now," he said. "That used to be a bad sign. But I want to see the cost of production rising along with rising production from the majors."
It sounds backwards until you work out what it would mean. Costs rising alongside output would tell you producers are finally pushing lower-grade rock through the mill instead of mining only their best material to make a quarter look good. At these margins, volume is the only job worth doing.
"The mission of a big producer right now is to run as much gold out the plant as they possibly can at these prices."
Copper is running the same play. It hit an all-time high of $14,617 a tonne on the London Metal Exchange on Tuesday, a second record session in a row. Deposits that made no sense at lower prices are suddenly economic, Lundin said, and it will take nearly all of them to close a supply gap he called something "we are unlikely to see ever again in our investing careers."
One cost is climbing faster than everything else, and it isn't fuel or labour. Government royalties rose 85% year over year against a 70% rise in the gold price, and have doubled as a share of production cost since 2021, from 6% to 12%.
Lundin has seen this movie four or five times now.
"In good markets, governments renegotiate those deals that they had," he said. "They don't like to see the miners making outlandish profits in their eyes. But they don't understand that those miners have taken significant risk to get to that point."
It's changed where he looks. These days he leans toward North America, Mexico and Latin America, on the simple logic that at this gold price you no longer have to accept a difficult jurisdiction to find something worth owning.
The one thing $4,400 gold can't fix
Price a metal high enough and most of a mining company's problems just evaporate. Lundin doesn't hedge on how far that goes.
Bad grade? "Cutoff grades are dropping," he said, and you'd have to get to an extreme case "before it would get fatal at these prices."
Ugly metallurgy, a brutal strip ratio, no road, no power?
"Price overcomes a lot of problems, just as grade used to overcome a lot of problems," he said. "It makes up for a lot of management mistakes even."
One thing outlives the price.
"About the only thing you can't overcome is permitting issues," Lundin said. "The high price doesn't necessarily affect that."
The other hazard is the one companies do to themselves. He described juniors that printed hundreds of millions of shares on the way to a sale and left their own shareholders with nothing to show for it.
"Every one of these companies is a burning match," he said. "You can dilute a company away and dilute the value away, and it's something every mining investor needs to watch carefully."
There's a flip side. The old rule that an explorer shouldn't try to become a miner doesn't hold when the money is there, he said. "At these prices, they can actually buy mining expertise, take your project, and bring it into production yourself."
Which leads somewhere most people haven't thought about.
"The natural other buyer for a project is often the company that owns it."
The money came back, and so did the drilling
Companies that couldn't raise a dollar 18 months ago are financing again, and Lundin says the reflex in a window like this hasn't changed in 40 years. "When the market offers you a check, take it. You never know what tomorrow holds."
What that money bought was the best drilling of his career.
"Over the last two summer drilling seasons, we've gotten results that I think were the best I've ever seen."
For years, he said, companies with good ground wouldn't drill it, because a good hole brought sellers instead of buyers. "It was like they were sticking their head out of a foxhole."
Not anymore. "The explorers have to put up or shut up, and largely now they're putting up."
What breaks it
Lundin made the bear case himself, unprompted, and it may be the sharpest thing he said all day.
Between 2008 and 2011, gold nearly tripled from low to peak. The miners barely moved. Some of them offered no leverage at all, because oil ran to $140 a barrel and diesel swallowed the difference. AAA put the national average diesel price at a record $5.85 a gallon last week.
What's different now, he said, is how much room there is.
"The gains in gold have overwhelmed those rises in energy cost. Operating costs are rising, but the gold price is still outpacing it, and margins are still expanding."
So could gold climb while the equities fall?
"It could," he said, "but we would have to see much, much higher diesel prices."
The meeting next week
Traders put the odds of a rate hike at 59.3% when the Federal Open Market Committee meets Sept. 15 and 16, according to CME Group's FedWatch tool. That would take the target range to 375 to 400 basis points. The odds have slipped from 66.1% after Fed Chairman Kevin Warsh told the Jackson Hole symposium on Aug. 28 that the central bank might have "work to do" on inflation.
Lundin doesn't buy it.
"I think that Kevin Warsh is a pretty decent guy. He's probably the best Federal Reserve chairman in my experience," he said. "But if he really thinks he can conduct a campaign of rate hikes, then he hasn't done the math. It just cannot be afforded, with the debt this large."
He thinks you can watch the market argue with itself in real time.
"Every time that Warsh opens his mouth, gold takes a hit, because the Western traders start to believe that Warsh can actually raise rates. And yet gold pops right back, because smart money comes back in."
What he got wrong
Asked about his most expensive mistake, Lundin didn't name a company.
"I've paid a lot of tuition over the years," he said. "I'm a very good buyer. And to be equally frank, I'm a lousy seller."
The one that still stings is January, when silver ran past $118 an ounce on the way to a record $121.62. "The market was handing us an opportunity to take profits, and we should have at the time."
He wouldn't put a number on the year ahead, and pushed back on being asked at all. "If I made a call on the gold price, then somebody twisted my arm awfully hard, because I'm usually smarter than that."
Direction, he'll give you.
"I think the trend is up. I think we have a whole lot more to go in this bull market."
Brien Lundin is editor of Gold Newsletter and host of the New Orleans Investment Conference, running Oct. 28 to 31. Kitco News will be there on location.
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