Miner details
Gold producers will have their balance sheets to answer for this week.
Investors usually care about basic things such as how much revenue and income companies earned when they report quarterly results. After all, these are essential building blocks to valuing a stock.
But in the case of Canada’s gold industry, they have become largely irrelevant.
The second-quarter earnings season for the gold miners begins Wednesday afternoon, and experts said there will be little to no interest in the actual profits. Instead, all the focus will be on liquidity and the overall health of balance sheets.
“It’s going to be about who is most aggressive in trying to defend their balance sheets,” said Greg Taylor, portfolio manager at Aurion Capital.
This is a direct result of the recent chaos in the gold market. Gold averaged just under US$1,200 an ounce in the second quarter, which ended June 30. But it subsequently crashed to below US$1,100 in July due to a strong U.S. dollar, which is rising on expectations that the U.S. Federal Reserve will raise interest rates this year.
The drop has squeezed liquidity across the gold sector and sparked a panic in head offices. Share prices have been destroyed. Gold miners have stayed quiet throughout the recent market volatility — although they’re in quiet periods ahead of earnings releases, they’re probably shellshocked as well — so investors will be reading their earnings statements very carefully to see how they plan to manage the downturn and maintain their margins.
Experts said everything should be on the table: adjusting mine plans, shelving new projects, finding more efficiencies, deferring capital spending, halting exploration, modifying debt obligations and cutting dividends.
Doing these things won’t be easy. Gold miners have spent more than two years cutting costs everywhere they can, so the low-hanging fruit is gone. But they really have no choice but to find more savings. At least a quarter of global gold production is underwater at a price of US$1,100 an ounce, according to some estimates. Companies such as Kin
ross Gold Corp. and Iamgold Corp. have cost structures that are disturbingly close to the current price. And other companies like BarrickGoldCorp. are carrying unsustainable levels of debt into this downturn. Even though they’re still profitable, their earnings are no longer big enough to support their overlevered balance sheets.
“You have to revisit your plan yet again and say, ‘ What’s the next level of cost-cutting I can potentially look at to continue operating the business,’ ” said Ron Stewart, an analyst at Macquarie Capital Markets.
He cited dividend cuts as one possibility. Barrick, which reduced its quarterly dividend by 75 per cent in 2013, could cut it the rest of the way and save about US$233 million a year. There are also rumours that Goldcorp Inc. will reduce its dividend, which costs the company nearly US$500 million a year.
The senior gold miners have performed well from an operating standpoint over the past couple of years, and may be hoping that another solid quarter of operating results will take pressure off their stock prices. But that seems highly unlikely. Just last week, U.S. gold giant Newmont
Mining Corp. reported solid earnings, and the stock still got crushed alongside all the other ones in the sector.
“The risk/reward is more to the downside than the upside,” Taylor said. “A huge earnings beat won’t be rewarded anywhere close to (how) a miss (will be punished).”
The Q2 earnings may well be used by investors as a “liquidity event” to get out of the gold stocks, which could push them even lower. That may seem unfathomable to some onlookers, who are still in shock at how far they have fallen. But recent market action has proven that the bottom of this market is a lot lower than most people imagined, and we may not be there yet.