If only gold mine operators could flatten their debt mountains as easily as they can the real things.
Mining companies built up record borrowings to boost gold output during a 12-year bull market in the metal that stopped dead in 2011. The 42 percent slump in prices since then leaves them effectively servicing the debt with devalued currency.
Output that might have fallen as gold sank has continued on to all-time highs as producers need to generate enough cash from sales at lower prices to keep up payments on what they owe.
That’s squeezed profitability and share prices, with a benchmark index of 30 of the biggest precious-metals miners falling to the lowest levels since 2001, when bullion was barely a quarter of its current rate of $1,110 an ounce.
“The industry is in a shocking state,” said Mark Bristow, head of Randgold Resources Ltd., the producer with the best share performance in the past decade. “Everyone is still focused on production and not on profitability.”
Growth in output has exacerbated an oversupply that makes a recovery in the bullion price harder to achieve, Bristow said.
Debt held by 15 of the biggest producers including Barrick Gold Corp. and Goldcorp Inc. hit a record $31.5 billion at the end of the first quarter, up from less than $2 billion in 2005, according to data compiled by Bloomberg Intelligence.
That was spurred by the dash for growth when prices were rising, including $8.5 billion for Barrick’s mine in the Andes mountains and C$8.2 billion ($6.3 billion) for Kinross Gold Corp.’s bet on Mauritania. In the past decade, world output expanded 24 percent to last year’s 3,114 metric tons.
“The whole industry is being encouraged to continue to live on hope,” Bristow said. “The question is how much cash flow do you need to expunge the debt? There’s nothing really left to create value for shareholders.”