Gold-Mining Stocks Slump to Lowest in Decade on Bullion Rout

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Why Is Gold Plunging?

A gauge of the world’s biggest gold-mining companies fell to the lowest in at least a decade as a rout in the precious metal deepened.

The 15-member Bloomberg Intelligence Global Senior Gold Valuation Peers Index, which includes Barrick Gold Corp. and AngloGold Ashanti Ltd., dropped 9.2 percent to 16.96 at the close in New York, the lowest since it began in 2005. Spot gold declined 3.3 percent to $1,096.50 an ounce, the weakest closing price since March 2010.

Gold has fallen out of favor as Federal Reserve Chair Janet Yellen prepares to raise U.S. interest rates this year, strengthening the dollar and reducing demand for havens. Producers are struggling to adapt to a lower bullion price after a decade of debt-fueled expansion, acquisitions and cost inflation during the boom years that saw bullion peak at $1,921.17 in September 2011.

“With low global inflation and an improving U.S. economy, I doubt we’ll see big economic shocks, which is not good for gold,” said Wayne McCurrie, who helps manage $8 billion at Momentum Holdings Ltd. in Pretoria, South Africa. “With a large element of fixed costs, miners are obviously geared to the gold price.”

Barrick, Newmont

Barrick Gold, the largest producer, tumbled 16 percent in Toronto, and Newmont Mining Corp. dropped 12 percent in New York. Newmont was the biggest decliner on Monday among companies in the Standard & Poor’s 500 Index.

The plunge in shares comes two days before Newmont reports second-quarter earnings, and will be followed in coming weeks by other North American producers. With gold prices tumbling, mining companies will focus on additional cost-cutting programs, Morgan Stanley analysts led by Brad Humphrey said in a note on July 14.

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Second-quarter profits among top gold producers are expected to fall about 22 percent compared with last year, according to the Bloomberg Intelligence Global Senior Valuation Peers Index.

A further drop in prices would squeeze margins for producers saddled with high-cost operations, according to Pawel Rajszel, an analyst at Veritas Investment Research Corp.

“The industry is not looking good in our view,” Rajszel said in a telephone interview last week. “That means the lower-cost producer should outperform, but companies with higher average costs, or generally just higher-cost mines, will do quite poorly.”

While Barrick is working to cut the biggest debt in the gold industry and Newmont is focused on reducing costs, Goldcorp Inc. is expected to show an improvement in the second half of the year, according to Farooq Hamed, a Toronto-based analyst at Barclays Capital. The Vancouver-based producer could post higher output as it ramps up output at its mines in Canada and Argentina, Hamed said in a note.

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