Gold producers are heading into third-quarter reporting season facing a second consecutive quarter of margin compression, as lower realised prices and stubborn cost inflation weigh on earnings, according to RBC Capital Markets.
Average gold prices fell 6% quarter-on-quarter to $4,266 per ounce in the three months to 30 September, following a 7% decline to $4,513 per ounce in the second quarter. Silver dropped around 14% over the same period, while energy prices remained elevated, continuing to add to operating costs across the sector.
RBC expects a modest production improvement across its coverage universe as companies begin to deliver on second-half ramp-ups guided earlier in the year, with all-in sustaining costs (AISC), the industry's key cost measure, expected to fall slightly on higher volumes and fixed cost leverage.
However, the bank warns that execution risk is elevated heading into year-end, with several companies facing material skews toward the fourth quarter.
Investor sensitivity to operational misses has increased following recent guidance revisions at Kinross and Alamos, and RBC said it expected heightened scrutiny of the various production ramp-ups currently under way across the industry.
The more significant concern flagged by RBC is the 2027 budget season now getting under way. Consensus capital expenditure and cost estimates for next year appear understated, with RBC forecasting year-on-year AISC growth of 4% and capital expenditure growth of 16%, compared to consensus estimates of 0% and 8% respectively.
The gap reflects the bank's expectations for higher energy and labour costs, larger reserve pricing changes driving grade declines, and rising discretionary spending as producers sit on strong balance sheets and healthy free cash flow.
Merger and acquisition activity picked up during the quarter, with deals including Artemis Gold's acquisition of Vista Gold, OceanaGold's purchase of AusGold and SSR Mining's acquisition of Roxmore. Gold Fields also made a rejected proposal to acquire Northern Star.
RBC said inorganic growth was becoming more prominent in capital allocation discussions, supported by strong balance sheets, elevated free cash flow generation and a narrowing gap between consensus and spot gold price assumptions.
At current spot prices, producers trade at 1.1 times price-to-net asset value and around 6 times 2026-27 enterprise value to EBITDA, with free cash flow yields of 6-7%. RBC described valuations as reasonable on a medium-term basis under a constructive gold outlook, but said near-term mixed pricing, elevated consensus estimates and execution sensitivity skewed risks to the downside heading into reporting season.
Newmont, which reports after market close today, is the first major producer to report.
