- Gold's main benchmark is quoted in US dollars, and most of Canada's key commodity exports are priced in US dollars, while a Canadian mine pays most of its costs in Canadian dollars.
- A weaker Canadian dollar lifts a Canadian producer's revenue in local terms, and because costs stay put, the margin can rise faster than revenue.
- The Bank of Canada notes commodity prices tend to move the Canadian dollar, so a currency gain and a metal price change often partly offset each other.
Introduction
A Canadian gold producer lives with two prices at once. Its gold sells for US dollars. Its wages, power, contractors and taxes are paid in Canadian dollars. The exchange rate between the two currencies decides how many Canadian dollars each ounce brings home, and so it sits right in the middle of the margin.
This guide explains how that works, why the effect is often larger than it first looks, why it tends to be partly offset, and what hedging does. It makes no call on where the Canadian dollar or any metal is headed. All numbers below are hypothetical.
Revenue in US dollars, costs in Canadian dollars: the exchange rate is part of the business model.
Metals Are Priced in US Dollars
The main global gold benchmark, the LBMA Gold Price, is set twice a day in London and, as the Royal Canadian Mint explains, quoted in US dollars per troy ounce. In a 2019 speech, Bank of Canada Deputy Governor Lawrence Schembri noted that most of Canada's key commodity exports are priced in US dollars.
A Canadian producer therefore earns a US dollar price and converts it at whatever the exchange rate is when it sells.
Costs Are in Canadian Dollars
A mine in Canada pays most of its costs at home: employees, contractors, electricity, local supplies, royalties and taxes. Some inputs, such as certain equipment, parts and fuel, may be priced in US dollars or follow US dollar prices, so the split is never perfectly clean. Company disclosure sometimes describes how much of its cost base is exposed to each currency.
How the Rate Moves the Margin
Suppose a mine sells gold at US$1,000 an ounce and its all-in costs are C$900 an ounce, all in Canadian dollars. Compare two exchange rates:
| US$1 = C$1.30 | US$1 = C$1.40 | |
|---|---|---|
| Revenue per ounce in C$ | C$1,300 | C$1,400 |
| Cost per ounce in C$ | C$900 | C$900 |
| Margin per ounce in C$ | C$400 | C$500 |
The US dollar strengthened against the Canadian dollar by about 7.7%. Revenue in Canadian dollars rose by the same amount. Because costs did not move, the margin rose by 25%. That leverage works in both directions: if the Canadian dollar strengthens, the margin shrinks faster than revenue.
The same effect shows up in a feasibility study's assumptions. Our AISC margin tool lets you see how margin responds to changes in price and cost, and an exchange rate change works through it in the same way.
The Built-In Offset
The Canadian dollar has floated since 1970, and the Bank of Canada has described commodity prices as a key influence on it. In the 2019 speech, Deputy Governor Schembri said the flexible exchange rate has helped the economy adjust to external shocks, primarily changes in commodity prices, with the currency tending to rise when commodity prices rise and fall when they fall.
A 2016 Bank of Canada staff analytical note found that both energy and non-energy commodity prices help explain movements in the Canada-US exchange rate, and that broad moves in the US dollar against other currencies were an even stronger factor.
For a Canadian miner, that means the two prices in its margin are linked. When metal prices fall, a weaker Canadian dollar can cushion part of the drop in local terms. When metal prices rise, a stronger Canadian dollar can take back part of the gain. The relationship is a tendency, not a rule, and it is driven heavily by energy prices and the US dollar, not by gold alone. Gold also responds to real interest rates, which we cover in why gold moves with real interest rates.
Hedging Basics
Some producers hedge part of their currency exposure:
- Forward contracts fix the rate at which a set amount of US dollars will be converted on a future date.
- Options set a floor or ceiling on the rate, at a cost, while leaving some room to benefit.
- Collars combine a floor and a ceiling, limiting both the downside and the upside.
Hedging reduces uncertainty, which can help a company meet debt terms or budget a construction program. The cost is that it also limits the benefit if the rate moves the company's way. Hedge gains and losses can make reported results look different from the underlying operations, so read the notes to the financial statements.
Explorers have no revenue to protect, so currency hedging is less relevant to them. They mostly raise and spend Canadian dollars.
The Same Effect Inside a Study
A preliminary economic assessment or feasibility study for a Canadian project converts a US dollar metal price into Canadian dollar revenue at an assumed exchange rate, then subtracts costs estimated mostly in Canadian dollars. The exchange rate assumption therefore works like a second price assumption.
Suppose two studies on similar projects both assume the same US dollar gold price, but one converts at US$1 = C$1.25 and the other at US$1 = C$1.40. The second will show higher Canadian dollar revenue on every ounce, a higher margin and a higher net present value, with no difference in the rock. Before comparing headline numbers from two studies, line up their metal price and exchange rate assumptions side by side. If the study reports in US dollars instead, the same question applies in reverse: at what rate were the Canadian dollar costs converted?
Reading the Numbers
- The reporting currency. Some Canadian-listed miners report in US dollars, others in Canadian dollars. Check which one before comparing companies.
- Costs per ounce. A cost quoted in US dollars for a Canadian mine has been converted at some rate. Look for the rate used.
- Study assumptions. Any PEA or feasibility study should state its exchange rate next to its metal price. A different rate can move the result materially.
- Sensitivity tables. Many studies show how NPV changes with the exchange rate. Read them.
- Hedge disclosure. Amounts, rates and maturities of any currency contracts.
This is general information, not advice. Read the filings on SEDAR+ and speak to your own adviser before making any decision.
Frequently asked questions
- How is the price of gold determined?, Royal Canadian Mint, 2023-03-10
- Flexible Exchange Rates, Commodity Prices and Price Stability (speech by Deputy Governor Lawrence Schembri), Bank of Canada, 2019-06-17
- Staff Analytical Note 2016-2: Predictive Ability of Commodity Prices for the Canadian Dollar, Bank of Canada, 2016-03-14
This article is published by Bellmare Capital, a brand operated by Apollo Shareholder Relations, for information and education only. It is not investment advice, a recommendation, or an offer or solicitation to buy or sell any security. Bellmare Capital is not a registered investment adviser or dealer, and this is not independent research.
Apollo Shareholder Relations provides paid investor relations, marketing and communications services to public companies, including companies in the sectors Bellmare Capital writes about, and may be compensated in cash or securities. Apollo, its principals, employees and contractors may hold securities of companies discussed and may buy or sell them at any time. Where an article covers a company that pays Apollo, it is labelled Sponsored at the top with the compensation and holdings.
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