Shanta Gold Executes on Production Driving Stronger Revenues in Q2

Shanta Gold reported Q2 2023 earnings that were “outstanding.” Their performance came despite relatively stable gold prices throughout the quarter (see chart). Shanta Gold said $23.2 million in EBITA, earnings before Interest taxes and amortization. Most of the gains during the quarter came from robust production gains. The company reported producing 29,403 ounces of gold, up 68% year over year and 92% month over month. The company said that the immediate increase in production was a benefit of adding Singida to its portfolio of assets. During its earnings call, the company reiterated that its production guidance remained at 90,000 to 98,000 ounces of gold. The company will face headwinds if gold prices turn lower, as higher production of lower gold prices will erode revenues. Alternatively, higher gold prices could see substantial benefits for Shanta assuming the company has only hedged a portion of its portfolio.

Advertisement

What is a Gold Producer

Shanta is a gold producer. A gold producer is a company or entity that engages in the extraction and production of gold. These companies typically own or operate gold mines or access gold deposits through various mining methods. Gold producers play a crucial role in the mining industry and contribute to the global supply of gold, which is used for multiple purposes such as jewelry, investment, and industrial applications.

Gold ore is a type of rock that contains gold particles. It is typically mined from gold deposits and is the primary source of extracting gold. Gold ore, such as mines, rivers, and underground veins, can be found worldwide. The ore is usually processed to separate the gold from the surrounding rock and minerals through crushing, grinding, and chemical processes. Gold ore is highly valued for its rarity and has been used for centuries in jewelry, currency, and various industrial applications.

Once obtained, the gold is typically refined and sold as bars, coins, or raw material for jewelry-making, electronics, and investments. Gold has various uses and is highly valued for its rarity, as well as its aesthetic and financial appeal.

Gold producers typically refine gold as part of their operations. After gold is extracted from the earth through mining, it usually contains impurities such as other metals or minerals. Refining is purifying the gold to remove these impurities and create high-quality, pure gold. This activity involves smelting, electrolysis, or chemical processes to separate the gold from other elements. Refining is essential to produce gold that meets industry standards and is suitable for jewelry, investment, or other industrial applications.

What are the Costs Involved in Gold Mining

Gold mining involves various costs at different stages of the mining process. One of the most significant costs is exploration costs. Before mining can begin, companies invest in exploration to identify potential gold reserves. This process includes geological surveys, drilling, and testing, which can be pretty expensive.

Once a potential gold deposit is identified, the mine must be developed. This process involves constructing mine infrastructure, such as roads, power supply systems, and processing facilities. The costs can vary depending on the complexity of the project and location.

These costs include the labor, equipment, and materials required for extracting gold from the ore. Key expenses in mining operations include wages, fuel, maintenance, and consumables used for mining activities like drilling, blasting, and hauling.

Processing costs occur after the ore is extracted; it must be processed to extract the gold. This system typically involves crushing, grinding, and leaching the ore using cyanide. Processing costs include equipment, chemicals, and energy required for the extraction process.

There are also environmental and regulatory compliance costs. Gold mining companies must adhere to strict environmental and regulatory standards, which can lead to additional charges. These costs cover environmental impact assessments, mine closure and reclamation plans, monitoring, and compliance with environmental regulations.

A gold producer also has maintenance and ongoing operational costs. Once the mine operates, ongoing expenses include equipment maintenance, staff wages, repairs, and other operational costs.

How Does a Gold Producer Generate Revenue?

Gold producers generate revenue through various means. The most obvious is gold Sales. The primary source of income for gold producers is the sale of gold. They extract gold from mines, refine it, and sell it to customers through bullion, bars, coins, or jewelry. The revenue generated depends on factors like the quantity and quality of gold produced, prevailing market prices, and the cost of extraction and refinement.

Gold producers also hedge and use futures contracts, OTC contracts, and contracts for differences. Some gold producers enter into hedging or futures contracts to manage the price risk associated with gold. These contracts allow them to secure a fixed price for future gold sales, providing stability to revenue streams.

Gold hedging is a gold trading strategy used by gold producers, consumers, and investors to manage their exposure to fluctuations in the price of gold. Hedging involves taking positions in derivatives such as futures contracts or options to offset the potential losses or gains caused by gold price changes.

For example, gold producers may hedge to lock in a future selling price for their gold, protecting themselves against a potential price decline. Likewise, gold consumers like jewelry manufacturers may use hedging to secure a future purchasing price, shielding against a price increase. Investors may also hedge their gold investments to mitigate the risk of price fluctuations.

Another source of revenue is By-Product Sales. Gold mining operations often yield other valuable minerals, known as by-products. These may include silver, copper, zinc, or other metals. Gold producers can generate additional revenue by selling these by-products.

Producers can generate income from streaming and royalty agreements. Gold producers sometimes enter into streaming or royalty agreements with third-party companies. In these arrangements, the producer sells a portion of its future gold production in exchange for an upfront payment or ongoing royalties. This activity allows them to access capital and generate revenue outside of traditional sales.

Producers also may sell exploration rights or enter partnerships to fund the exploration of new gold deposits. These discoveries can lead to future revenue streams through new mining operations.

What is Gold Derivative Trading

There are several common types of gold derivatives trading.

1. Gold futures contracts are financial agreements to buy or sell a specified amount of gold at a predetermined price on a future date. They are standardized contracts traded on exchanges, such as the Chicago Mercantile Exchange (CME) or the New York Mercantile Exchange (NYMEX). These contracts allow investors and traders to speculate or hedge against future price movements in gold without directly owning physical gold. By trading gold futures contracts, participants can take advantage of price fluctuations and potentially profit from their predictions regarding the future direction of gold prices.
2. Gold OTC (Over-the-Counter) derivative trading refers to the buying and selling of gold derivatives through bilateral negotiations between parties rather than on a centralized exchange. OTC derivatives are financial contracts whose values are derived from an underlying asset, in this case, gold.

In OTC derivative trading, participants enter into customized contracts that suit their needs and directly negotiate between two parties. This process allows for flexibility in contract specifications, such as size, maturity, and settlement terms, which may not be available in standardized exchange-traded derivatives.

OTC derivative trading in gold includes various contracts such as forwards, options, swaps, and other complex structures. It allows market participants to hedge against or speculate on gold price movements without the restrictions of exchange-traded products.

3. Gold CFD trading, also known as Contract for Difference trading, is a financial derivative that allows traders to speculate on gold’s price movement without owning the physical metal. When trading gold CFDs, traders enter into a contract with a broker to exchange the difference in the price of gold from the opening to the closing of the agreement.

Do Gold Prices Have an Impact on Gold Producers

Gold prices have a significant impact on a gold producer’s bottom line. When the price of gold rises, it generally enhances a gold producer’s profitability. A higher gold price means that gold producers can sell their gold at a higher price per ounce. This phenomenon directly translates into higher revenues for the company.

With higher revenues, gold producers can benefit from increased profit margins. This is particularly true if their production costs remain relatively stable. The difference between the cost of production and the selling price (often referred to as the “margin”) widens, leading to improved profitability.

Some gold producers may hedge to protect against potential price declines. While hedging can provide price stability, it can also limit the upside potential if gold prices rise significantly.

The Bottom Line

The upshot is that it was clear that despite a stable price change, more production led to Shanta Gold reporting robust Q2 2023 earnings results. For the company to continue to generate higher revenues on larger volumes, it will need prices to rise and costs to remain stable.

Disclaimer : The above is a sponsored article and the views expressed are those of the sponsor/author and do not represent the stand and views of The Tribune editorial in any manner.