TORONTO – With gold prices posting the best first half in almost four decades, the coming round of earnings reports may provide signs miners are preparing to ease their collective death grip on spending.

Big producers had focused on deferring projects, curtailing operations and otherwise slashing costs and debt as prices declined for three years in a row. That has raised concern companies won’t be able to maintain current output levels as mines get older and the smaller explorers and developers get squeezed.

The situation is poised to change, with gold futures up 25% this year and the potential for the rally to continue given economic uncertainties such as the UK’s decision to exit the European Union, according to Josh Wolfson, a Toronto-based mining analyst at Dundee Capital Markets.

“Historically there’s been a very high correlation – almost a one-to-one correlation – between costs and the gold price, implying that with higher gold prices you will likely see costs rise at the same time,” Wolfson said in a phone interview last week.

Most miners have structured their spending based on the assumption gold will trade in a range of $1 100 to $1 150 an ounce, Wolfson said. Some companies such as Barrick Gold Corp. have been even more conservative, assuming $1 000 gold when mapping out their annual budget and $1 200 for significant longer-term capital investments. Futures rose 0.1% to $1 329.90 at 8:54 a.m. on the Comex in New York.

In an interview this month, Barrick President Kelvin Dushnisky said the world’s largest gold miner will retain its focus on reducing leverage and could have zero debt within a decade. Similarly, Newmont Mining Corp. Chief Executive Officer Gary Goldberg said his Colorado-based company has room to trim costs further over the next year or two, and plans to focus on organic growth with the potential to add production ounces from existing properties.
Into Reverse

Barrick declined to comment further on its spending plans ahead of earnings next week. Newmont said it’s advancing four profitable development projects. “Over the last three years we have generated $1.9-billion from the sale of noncore assets, significantly reduced costs and lowered net debt by 37%, allowing us to self-fund profitable, new gold production,” Omar Jabara, a spokesperson, said Monday by e-mail.

A sector-wide shift to tighter purse strings was born of necessity after the end of a heady 12-year boom that saw gold peak in 2011 above $1 900 an ounce. The relentless slide that followed threw a massive spending spree into reverse as debt-to-profit ratios climbed, mineral deposits became unprofitable and companies’ shares crashed. A gauge of 14 global gold producers tracked by Bloomberg Intelligence fell for five years through 2015.

This year, the index has more than doubled.

Rising precious-metal prices are expected to help bottom lines at the biggest miners. Newmont, the largest US-based producer, releases earnings after the close of trading on Wednesday. Barrick reports next week, as does Goldcorp Inc., the second-largest Canadian producer. Overall, the gold sector is expected to show positive earnings momentum in the second quarter and a return to positive free-cash flow, according to a June research report by Andrew Kaip, an analyst with BMO Capital Markets.

‘Incremental’ Capex

Michael Siperco believes the current focus on financial prudence won’t be discarded quickly. The Toronto-based analyst at Macquarie Capital Markets says this round of earnings will show only “incremental” capex increases and companies will be reluctant to announce larger spending plans further out.

“I think management teams are still going to play it fairly tight to the vest,” Siperco said last week by phone. “Maybe 2017 guidance looks markedly different than 2016 guidance, but I don’t expect you would see midyear changes to guidance that imply a lot more capital development in the near term.”

For spending to increase substantially, Siperco says gold needs to climb into a range of $1 400 to $1 500 an ounce, “where I think the game really materially changes.”

$1 500 Gold

Prices could touch $1 500 an ounce in the next six to 12 months as the US heads into a national election, Francisco Blanch, head of commodities research at Bank of America Merrill Lynch, said last week in a Bloomberg TV Canada interview. DBS Group Holdings Ltd., which foresaw this year’s rally, also believes gold is in a major bull market and may surge to more than $1 500 an ounce.

If they’re right, miners will find it much easier to convince investors that increased spending is warranted for new projects, rather than reversing course on previously implemented belt-tightening, Siperco said. For that reason, any sector-wide rise in capex is likely to be driven by increased merger-and-acquisition activity, he said.

Raising Money

There has been a flurry of equity offerings in the mining sector in recent months, including bought deals by Lundin Gold Inc., TMAC Resources Inc. and Guyana Goldfields Inc., boosting the capacity of the sector to expand operations or build new mines. Companies including Franco-Nevada Corp. and Sandstorm Gold Ltd., which provide funds to gold miners in exchange for discounted future production, have also raised money.

Meanwhile, large miners have been making small investments in early-stage projects. Last month, Barrick bought an 8 500-acre property in Nevada from Coral Gold Resources Ltd. for $15.75 million, while Newmont spent C$17.5-million ($13.4-million) to maintain its 29% stake in TMAC through the bought deal.

Dundee’s Wolfson said he expects to see a rise in exploration spending soon, as companies attempt to refill their production pipelines after the spending drought.

In May, Vancouver-based Goldcorp agreed to buy exploration company Kaminak Gold Corp. in a share swap arrangement for about C$520-million. Goldcorp declined to comment on their spending plans ahead of their second-quarter earnings release.

Like Siperco, BMO’s Kaip believes it’s too early for large companies to announce spending increases, though expansion will be internal.

“You’ve seen bought deals from smaller companies,” Kaip said Monday by phone. “I think you’ll see the senior companies move forward on a number of their internal opportunities and advance them.”