June/July 2013

Golden age of austerity

April’s gold price drop forces miners to re-evaluate plans

By Anna Reitman

After hitting US$1,750 in November, the price of gold decreased steadily in 2013 before plummeting in mid-April | Courtesy of www.kitco.com

Gold miners have been under fire for not capitalizing on a rising gold price for some time. But now that the price for the precious metal has fallen, shareholders are eyeing anticipated cost-cutting measures closely.

In mid-April, gold prices dropped by more than $200, and, while heavy physical buying in Asia has helped ease some fears, producers big and small are lining up to announce operational reviews in quarterly earnings results.

Citing the drop in price as impetus for change, Canadian producer Yamana Gold announced an evaluation of production targets for future years, including pending projects Cerro Moro, Suruca and Corpo Sul in South America. Producing mines with all-in costs exceeding the company’s average, such as Jacobina and Ernesto/Pau-a-Pique, are also being scrutinized, though Yamana noted these projects are expected to continue as they present a significant value at or below current metal prices.

During a conference call in May, Goldcorp president and CEO Charles Jeannes said the company believes the recent drop in the gold price is a mid-cycle correction as opposed to the start of a bear market. Nevertheless, the company will be looking at priorities to determine where reductions or deferrals in spending programs could be made in the event of a lower sustained price.

Newcrest, which has operations in Australia, Papua New Guinea, Africa and Indonesia, announced in a release that with “major projects ramping up and the more challenging external environment, [the company] continues to review all of its business activities, particularly those related to higher-cost current or future production.”

And Barrick Gold has been hit hard as it faces a huge drop in share price, major setbacks at Pascua-Lama in Chile, and aftershocks from a Moody’s downgrade of senior unsecured debt. The rating, according to Moody’s, considers “metal price volatility, operating and development cost pressures (and) risk of major project delays,” among other factors.

These majors face a common set of challenges, but change brought about by falling prices is not necessarily a bad thing, said Carole Ferguson, analyst at SP Angel.

“It does depend on how [prices] fall and affect long-term operational forecasts,” she said. “But when prices get settled, buyers can look at valuations and pick up assets on the lower end of the cost curve.” Moreover, marginal projects are unlikely to come on-stream, which should lend price support, she added. As pressure to lower capital expenditures intensifies, overheads associated with projects in development, senior management wages, sub-contractor and consultancy costs, as well as overall staff numbers, could end up at the top of most lists for scrutiny.

Meanwhile, marginal producers all over the world are being shaken out. Tanami Gold halted production and laid off staff at its Coyote Gold mine in Australia, which had quarterly production of just over 5,000 recovered ounces at a cash cost including royalties of C$2,005 per ounce. The majority of operations at U.S. Silver & Gold’s Drumlummon gold mine in Montana are set to close by the end of June after quarterly production of about 21,000 silver ounces and 2,150 gold ounces at US$2,288.73 per gold ounce. “Unfortunately production at the Drumlummon mine is not economically viable at current gold prices,” said its president and CEO, Darren Blasutti, upon releasing the company’s first quarter results.

“These are the first of many [closures] and I think it has just started,” Ferguson said, adding that high-cost operations being shuttered are a good reflection of market sentiment. If shareholders are not expecting to get value from capital growth, she said, they are expecting it from income streams. But even companies an­nouncing dividends are on the defensive. Randgold Resources, for example, recently paid a US$0.50 per share dividend amid a revolt over executive pay.

To better represent incurred expenses, the reporting of all-in cash costs is gaining momentum. The measure includes royalties, fiscal terms, sustaining capital expenditures and management overheads. It is not yet stand­ardized across the industry, but the move towards greater transparency is widely applauded by the investment community.

And as the gold price remains volatile, the strategies that end up appeasing disgruntled investors have yet to be proven. For the foreseeable future, Ferguson said, managing costs is likely to remain the marching orders as shareholders look for austere operations and target inflated salaries at companies – both small and large.

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