Gold prices are showing increased volatility, prompting renewed investor focus on cost discipline and margin resilience across the mining sector, according to analysts at Jefferies.
The price of gold fell more than 3% to trade just abot $4,400 per ounce on Monday.
The firm noted that bullion has pulled back significantly from earlier highs, with prices now up only about 1.4% year-to-date after gains of roughly 20% in January. At the same time, gold equities have lagged, with the GDX ETF down around 3.5%.
“This recent pullback in gold prices has brought operating margins back to the forefront for investors,” the analysts wrote, particularly after a period in which elevated prices had masked underlying cost pressures.
As prices ease, producers are facing greater scrutiny over their ability to sustain profitability. “Lower spot prices pressure top-line, making cost discipline the key differentiator among producers,” Jefferies wrote, adding that margin preservation is likely to outweigh production growth as the main driver of relative performance in the near term.
The shift comes after a period of rising cost guidance across the industry, driven by factors such as inflation, higher royalties and share-based compensation. While these increases were largely overlooked during the price rally, Jefferies said that dynamic is now reversing.
“At current levels, operating leverage is again working in reverse, exposing differences in underlying cost structures and balance sheet flexibility across the sector,” the frim wrote.
Higher-cost producers are particularly vulnerable in the current environment, given the relatively fixed nature of sustaining capital, labour and site-level overhead expenses. Although cost inflation has moderated from peak levels, risks remain. Jefferies pointed to the potential for renewed pressure “the longer the Iran war persists,” warning that elevated absolute costs leave thinner buffers if prices weaken further.
Against this backdrop, the firm highlighted several miners it believes are better positioned to maintain margins at current spot prices of around $4,350 per ounce, including Dundee Precious Metals Inc (TSX:DPM), Lundin Gold (TSX:LUG), Kinross Gold Corporation (TSX:K) and Pan American Silver Corp. (TSX:PAA, NASDAQ:PAAS).
Jefferies noted the differences between traditional miners and streaming and royalty companies, which it said are structurally less sensitive to price swings. “Unlike miners, streamers and royalty companies typically operate with largely fixed cash cost structures, with minimal exposure to operating or sustaining capital inflation,” the analysts wrote. This allows such companies to “preserve margin and cash flow more effectively than most producers” during periods of declining or volatile gold prices.
While these companies may sacrifice some upside in a rising price environment, Jefferies said their defensive characteristics become more valuable when prices reset lower and margin risk returns to focus. As such, the firm maintained ‘Buy’ ratings on Wheaton Precious Metals Corp (LSE:WPM, TSX:WPM, NYSE:WPM), Royal Gold, Inc. (TSX:RGL) and Triple Flag Precious Metals (TSX:TFPM).