DarrelCamden-Smith/iStock via Getty Images The Q4 Earnings Season is finally underway for the Gold Miners Index ( GDX ), and one of the first companies to report its results is Equinox Gold ( EQX ). While the company trounced its peers in the growth department, growing production 26%, its costs rose at an even quicker pace, coming in 20% above the industry average at $1,350/oz. Given higher fuel prices and inflationary pressures (labor, consumables, materials), costs will remain elevated in 2022/2023, partially offsetting EQX’s attractiveness as an industry-leading growth story. Based on what I believe to be a conservative fair value for EQX of ~$8.60, I see limited upside from current levels. Equinox Gold Operations (Company Website) Equinox Gold released its Q4 and FY2021 results last month and had a strong finish to the year, reporting record quarterly production of ~210,400 ounces. This was helped by a massive quarter from Mesquite (~66,900 ounces), a solid quarter at Los Filos, and a strong finish to the year at Aurizona. These strong performances helped Equinox to surpass the 600,000-ounce mark for the first time, with annual production coming in at ~602,100 ounces, up 26% year-over-year. Let’s take a closer look at the results below: Equinox Gold – Quarterly Production (Company Filings, Author’s Chart) As shown in the chart above, Equinox has not had any trouble with growth, managing to more than double production on a two-year basis following the merger with Leagold in early 2020. Despite divestments (Pilar, Mercedes), this growth is expected to continue in 2022, with the company guiding for production of 668,000 ounces at the mid-point, translating to 11% growth year-over-year.
This is phenomenal after a year of 26% growth, especially when we consider the difficult year-over-year comps. These difficult comps are related to lapping strong growth in 2021 and the fact that Equinox will see limited contribution from Mercedes/no contribution from Pilar, which both contributed last year. However, while the production growth has been impressive, inflationary pressures have taken a toll on costs. It doesn’t help that Equinox moves a significant amount of material at its operations, being a low-grade producer.
Some miners like Yamana Gold ( AUY ) have seen relatively muted increases in operating costs helped by operating massive mines (Malartic) or high-grade underground operations (Jacobina, Cerro Moro, El Penon, Minera Florida). However, with relatively low-grade operations (Castle Mountain, Mesquite, RDM) that don’t benefit from economies of scale to the extent that a major mine like Detour Lake or Malartic would, it’s been difficult to control costs. The continued rise in fuel prices is not helping this, nor is the fact that Equinox operates several mines in Brazil, which has one of the highest inflation rates globally. Equinox – Quarterly Gold Price, All-in Sustaining Costs & Margins (Company Filings, Author’s Chart & Estimates) If we look at Equinox’s all-in sustaining costs, average realized gold price, and margins in the above chart, we can see that Equinox’s margins declined sharply on a year-over-year basis in Q4, from $813/oz to $526/oz. Some investors might be anxious to see the Q1/Q2 2022 results with the benefit of rising gold prices. Still, with all-in sustaining costs expected to come in above $1,500/oz in H1 2022, I would expect to see further margin compression sequentially (H1 2022 vs. Q4 2021) even with the help from the gold price. Equinox Gold – All-in Sustaining Costs & Forward Estimates (Company Filings, Author’s Chart & Estimates) It is important to note that Equinox will see an improvement in costs in H2 2022 and that this is a higher-cost year for the company due to stripping campaigns and deferred development at Los Filos. However, while this is leading to slightly higher costs this year, much of the cost increases that Equinox has seen are not going to suddenly roll off like elevated stripping costs, and I would not expect to see costs decline sharply in 2023. Instead, I think it’s more likely that we’ll see costs of ~$1,330/oz in 2023 which would still place Equinox’s costs well above the industry average (~$1,090/oz). So, why is this relevant?
This is important because while many of Equinox’s peers will enjoy margin expansion in 2022 due to rising gold prices, Equinox may see more muted margin expansion, especially in H1 2022. This is because it is expecting to see an increase in costs year-over-year based on its guidance mid-point of ~$1,372/oz, and I believe it’s likely we’ll see costs well above this cost guidance mid-point. Hence, even if […]
source Equinox Gold: Attractive Growth Profile Offset By Elevated Costs
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