Gold Miners Approaching $1,300 Pain ThresholdLiezel Hill and Eric Lam
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 percent of production unprofitable.
Gold futures fell 9.3 percent to settle at $1,361.10 in New York yesterday, taking losses to more than 20 percent since the record close in August 2011 and 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 percent 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 yesterday 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.
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 yesterday. 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 percent in Toronto yesterday, the biggest decline since Dec. 1, 2008, and another 0.9 percent today. Barrick dropped 12 percent to C$20.30 at the close in Toronto yesterday, and an additional 5.2 percent today, while Goldcorp Inc., the second-biggest Canadian gold miner, dropped 5.6 percent to C$28.38 yesterday and was unchanged today. Newmont Mining Corp., the largest U.S. gold producer, declined 6.7 percent to $33.92 yesterday in New York, and fell 0.4 percent today.
Gold futures fell yesterday in the biggest drop for a most-active contract since March 17, 1980, as optimism that a U.S. recovery will curb the need for stimulus cut demand for the metal as a protection of wealth. Gold rose 1.9 percent to settle at $1,387.40 an ounce today.
“There may be opportunities to pick off the trash heap tomorrow but for now you want to stand back and avoid the train unless you’re able to look out many, many months,” Barry Schwartz, a fund manager at Baskin Financial Services Inc. in Toronto who helps manage about C$500 million ($490 million), said yesterday by phone. “It’s scary but these things happen in markets and life goes on.”
Producers already focused on cutting expenses will probably accelerate those efforts, said John Bridges, a New York-based analyst at JPMorgan Chase & Co.
“There’s a lot of flexibility at a mine level with respect to spending,” Bridges said yesterday by phone. “The lower the gold price the more they are going to push the issue.”
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 mine plans to focus on richer, more profitable ore.
“We’re at levels today, both on gold and silver, where investing capital has to stop for a number of operators,” Kaip said yesterday in a phone interview.
Smaller North American producers including Winnipeg, Manitoba-based San Gold Corp. and Toronto-based Lake Shore Gold Corp. are vulnerable to lower gold prices, Kaip said.
Spokesmen for San Gold and Lake Shore didn’t immediately respond to voicemails seeking comment yesterday.
‘Kind of Cheap’
Among the larger North American producers, Toronto-based Iamgold Corp. stands out as one of the higher-cost gold miners, said Pawel Rajszel, an analyst at Veritas Investment Research Corp. Iamgold, which fell 8.9 percent yesterday and 5.1 percent today, has lost 56 percent of its market value this year. Bob Tait, an Iamgold spokesman, wasn’t available to comment yesterday outside of regular business hours.
“The one name that is kind of cheap and I think can weather the storm is Barrick,” Rajszel said. “They just have to get their act together.”
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 current 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 e-mail. “Near-term volatility in metal prices only reinforces the need to run our operations as efficiently and safely as possible to maximize profitability.”
Barrick, which is building the Pascua-Lama mine on the Chile-Argentina border at a cost that could reach $8.5 billion, faces a “moderate probability of a single-notch credit-rating downgrade” if gold prices stayed at $1,400 from the second quarter of this year through 2015, the RBC analysts said.
Standard & Poor’s Ratings Services lowered its credit rating on Toronto-based Barrick in July to BBB+, three levels above non-investment grade, with a negative outlook.
“The company maintains an investment-grade balance sheet supported by a high-quality, diversified portfolio of assets that will continue to generate substantial operating cash flow at present gold prices,” Andy Lloyd, a Barrick spokesman, said yesterday in an e-mailed statement.
Fidelity Investments’ Wickwire said he believes the gold price drop, which looks similar to declines in 2008, is only temporary and that now is a good time to buy gold companies.
“I liken the gold space to a financial-assets insurance policy,” Wickwire said. “You want to buy your insurance policy when it’s cheap, it’s inexpensive and it’s not obvious that you need it.”
Jeffrey Burchell, a fund manager with Toronto-based Aston Hill Financial Inc., said investors should wait before looking for buying opportunities.
“We’ll have downturns in the price for sure and then we’ll have some relief rallies, but you need a shakeout,” Burchell said. “You need the high-cost producers to move away from high-cost production and take supply out.”