The Gold Report: The U.S. dollar is worth about CA$1.20. In percentage terms, how is that translating to the margins of Canadian precious metals producers?
Philip Ker: Margins are obviously a function of revenues minus costs. Our model currently uses $1,250 per ounce ($1,250/oz) gold and a $0.90 or CA$1.11 exchange rate. This means we’re forecasting CA$1,388/oz for Canadian producers, but a favorable strengthening of the U.S. dollar toward $1.25 or CA$0.80 would allow Canadian producers to realize gold prices around CA$1,560/oz—a 12.5% increase.
More recently, gold has risen alongside the U.S. dollar. Typically these two have a negative correlation but the opposite trend has provided a boost to many equities with Canada-based operations. In late January, a $1,300/oz gold price and CA$1.25 exchange rate meant a gold price in excess of CA$1,600/oz—a potential 17% increase to margins. For example, a low-cost gold producer like Lake Shore Gold Corp. (LSG:TSX), which is projecting all-in sustaining costs of US$950–1,000/oz, could see profit margins reach greater than CA$350/oz on 170,000–180,000 oz (170–180 Koz) of production. This is just remarkable leverage.
TGR: Are margins like those enough to revise your investment thesis for 2015?
PK: You can’t build an entire investment thesis just on an exchange rate but some names will benefit more than others. Investors should always consider a company’s assets, management and any political or operational risk that may exist.
TGR: Is the current U.S. dollar/Canadian dollar exchange rate sustainable?
PK: We should continue to see a stronger U.S. dollar in the near term, particularly with the Canadian economy’s heavy exposure to oil. That sector has sold off considerably, thus putting negative pressure on the Canadian dollar.
TGR: The strong U.S. dollar is also helping companies …read more