Gold’s fall likely to push miners on cost containment
Gold miners led by Barrick Gold Corp., the world’s largest, will likely accelerate spending cuts and trim high- cost output as the metal’s biggest plunge since 1980 threatens to make about 30 per cent of production unprofitable.
The price of gold rallied Tuesday with the spot price rising $ 40.82 to close at $ 1,389, recovering a bit of ground from Monday’s $ 140 tumble.
However, since its record close in August 2011, gold futures have lost more than 20 per cent, meeting the common definition of a bear market.
The average so- called all- in cost of 20 gold producers was about $ 1,306 an ounce in the fourth quarter, Toronto- based analysts at Dundee Capital Markets said in an April 12 note. “Below $ 1,300 gold, about 30 to 40 per cent of mine production is probably not cash- flow positive,” Joseph Wickwire, the Boston- based manager of Fidelity Investments’ Select Gold Portfolio fund which has about $ 2.14 billion under management, said Tuesday in a telephone interview.
While producers have enjoyed 12 consecutive annual price gains as gold surged more than sixfold from $ 273.60 an ounce at the end of 2000, profit margins were squeezed last year by soaring costs that increased faster than the metal.
Gold companies were unloved even before the price plunge, having underperformed the precious metal for each of the past six years after money- losing takeovers and over- budget projects and as investors plowed billions instead into gold- backed exchange- traded funds.
Now, gold companies’ balance sheets could experience “significant pain” if gold has a sustained slide under $ 1,300 an ounce, analysts at RBC Capital Markets said in a note on Tuesday.
RBC estimates the average all- in costs for North American gold producers at about $ 1,200 an ounce.
“We would expect all the gold producers in our coverage universe to cut all discretionary expenses, cut capital spending sharply, defer new capital development programs and, in some cases, cut dividends” at that level, RBC’s Stephen Walker, Dan Rollins and Sam Crittenden said in the note.
The 54- company Standard & Poor’s/ TSX Global Gold Sector Index plunged 9.3 per cent in Toronto Monday, the biggest decline since Dec. 1, 2008.
Barrick dropped 12 per cent to $ 20.30 at the close in Toronto Monday, and an additional 5.2 per cent to $ 19.24 Tuesday, while Goldcorp Inc., the secondbiggest Canadian gold miner, dropped 5.6 per cent to $ 28.38 Monday and remained relatively unchanged losing just five cents Tuesday.
Producers already focused on cutting expenses will probably accelerate those efforts, said John Bridges, a New York- based analyst at JPMorgan Chase & Co.
Companies will start by cutting exploration and “non- critical” spending, said Andrew Kaip, a Toronto- based analyst at BMO Capital Markets. Producers that operate high- cost mines will need to re- evaluate their plans to focus on richer, more profitable ore.
Yamana Gold Inc. and Agnico- Eagle Mines Ltd. are also lower- cost producers, although they trade at higher valuations, he said.
Goldcorp, New Gold Ltd., Yamana and Agnico have the greatest capacity to withstand lower gold prices without changing their business plan or depleting lines of credit, RBC said in its note.
Jeff Wilhoit, a Goldcorp spokesman, declined to comment on the implications of the lower gold price because the company is in a quiet period ahead of its first- quarter earnings release May 2.
“Mining is a long- term business with planning horizons that extend well into the future,” Omar Jabara, a spokesman for Newmont, said in an email. “Near- term volatility in metal prices only reinforces the need to run our operations as efficiently and safely as possible to maximize profitability.”
Newmont forecast all- in sustaining cash costs of $ 1,100 to $ 1,200 an ounce in 2013, while Barrick said it expects costs of $ 1,000 to $ 1,100.
Barrick faces a “moderate probability of a single- notch credit- rating downgrade” if gold prices stay at $ 1,400 from the second quarter of this year through 2015, the RBC analysts said.