The latest decline in the price of gold is saddling higher-cost producers with losses on every ounce mined, and pushing others to the brink of also slipping into the red.
Gold fell to a four-year low of $1 160.50 (R12 870) an ounce last week, below production costs for five of 19 mining companies tracked by Bloomberg Intelligence, including Harmony Gold Mining, South Africa’s third-largest producer, and Primero Mining.
Three more producers are within $50.
“What’s developing is almost a two-tier type of market,” said John Ing, chief executive at brokerage Maison Placements Canada, speaking by phone.
One tier has companies with good assets and lower costs, while the other comprises producers “who are saddled with high-cost operations” and stretched balance sheets.
“Investors are looking through the so-called carnage and are holding onto the top tier and are dumping the second tier,” he said.
The seeds of the industry’s predicament were sown during gold’s 12-year bull run, when it rose to a record $1 923.70 an ounce in New York in 2011.
Mining costs were allowed to spiral “out of control” and mines were built assuming high prices, said Mike Schroder at Old Mutual Investment Group in Cape Town.
Producers “were all looking for volume rather than value when the times were good,” said Schroder, who helps manage 574 billion rand in assets.
“Now they’re paying for that.”
Gold Index
As gold prices fell 4.9 percent last week, the Standard & Poor’s/TSX Global Gold Sector Index of 40 producers plunged 16 percent.
About a third of worldwide output is probably cash-flow negative with gold at less than $1 250 an ounce, according to Joe Wickwire, who manages the Fidelity Select Gold Portfolio.
There are producers making money at current prices.
In the third quarter, so-called all-in sustaining cash costs were $834 an ounce for Toronto-based Barrick Gold and $711 for Englewood, Colorado-based Alacer Gold.
The measurement includes the expense of mining as well as replacing reserves through exploration, as well as other costs like corporate expenses.
Not all mining companies calculate this figure the same way, and not all companies report it.
‘Resilient’ Producers
Goldcorp, Randgold Resources and Eldorado Gold are among “resilient” producers with flexible business plans and strong balance sheets, according to Stephen D. Walker, an analyst at RBC Capital Markets in Toronto.
The reckoning began in 2012.
Several chief executives, including those of Barrick and Kinross Gold, were fired, and the industry took more than $26 billion of writedowns after prices declined in 2013.
Those efforts didn’t impress investors.
The market value of the S&P/TSX index has slumped by about two-thirds in the past three years.
Investor flocked to gold-backed exchange-traded funds when prices were rising, which allow them to capture gains in the price of the commodity without the added complication of storing physical metal.
While gold miners might have been optimistic that higher prices would finally lift earnings, the metal has fallen again.
It’s about 39 percent lower its peak three years ago.
It fell last week by the most since September 2013 as the US dollar strengthened, after the Bank of Japan unexpectedly boosted stimulus and the Federal Reserve ended asset purchases.
‘Currency of Fear’
“The gold price for us is the currency of fear, and fear in the market seems to be abating, rightfully or wrongfully,” said Guido Barthels, chief investment officer at Ethenea Independent Investors SA in Luxembourg.
While producers seek to reduce costs, the fate of the gold market is largely out of their hands.
Garrett Nelson, an analyst at BB&T Capital Markets, lowered his rating on Newmont Mining to hold from buy, even though he said the US company had made good progress cutting expenses, selling assets and “controlling what it can control.”
“It’s been one headwind after another for gold, and we are opting to move to the sidelines instead of continuing to fight the tape,” Nelson said in a November 3 note.
Harmony Gold’s all-in sustaining cost was $1 264 an ounce in the quarter that ended in June.
The company gets some protection from the drop in the dollar gold price as its costs are in rand, said Henrika Ninham, a Harmony spokeswoman.
It’s due to report fiscal first-quarter results before the start of trading today.
Cutting Costs
Primero reported second-quarter all-in sustaining costs of $1 228.
The Vancouver-based company is “confident” it can reduce production costs next year, Tamara Brown, a spokeswoman, said in an e-mail yesterday.
Its main asset had costs of $626 an ounce in the second quarter.
The most recent data from DRDGold, a South African miner, and Canada’s AuRico Gold and Golden Star Resources also show costs higher than current prices.
Golden Star spokeswoman Angela Parr said the company plans to reduce cost levels “dramatically” over the long term.
DRDGold chief executive Niel Pretorius wasn’t available for comment when contacted outside of regular business hours, according to a spokesman.
Gold falling to $1 100 would mean some companies may have lines of credit withdrawn, may suspend high-cost mines, or they may have to hedge output, according to RBC’s Walker.
“New development projects will likely not get board approval,” Walker said yesterday in a note.
Currency Conversion
Anne Day, an AuRico spokeswoman, said the stronger US dollar will benefit companies that operate outside the US, including the Toronto-based producer that has operations in Canada and Mexico.
It’s a mistake to lump all the producers together, according to Fidelity’s Wickwire.
While the market continues to be very sceptical about the industry, the pessimism is overdone for some of the better positioned companies, he said.
“If you’re going to own a gold mine, you want to make sure you’re there with very good operators,” said Don Reed, a Toronto-based fund manager at Templeton Global Equity Group.
