Paradigm shift in the pm mining industry from growth to profitability

[swissaustrian]

I've spent a few hours researching mining companies today. The current drop in prices presents some bargains, but not as many as one would wish for. However, the big picture is clear: The large miners have finally gotten the message that production growth no matter what is not the appropriate way of creating shareholder value. Bigger projects don't necessarily mean increased profits. As an example for this paradigm shift, watch this webcast by Barrick's (ABX) new CEO:
http://audability.com/AudabilityAdm...364_211201380000AM/primary.aspx?Event_ID=1364

Additionally, it seems that the escaltion of costs has finally forced the miners to come clean and disclose all-in costs/oz (incl. reserve replacements/exploration, administrative expenses etc.) instead of just cash costs/oz. This way we can see all-in costs of $1200+/oz. Additionally, these all-in costs have been growing at high single-digits percentages every year over the last 5 years. These facts alone should debunk the "gold is going to $1000 soon" talk. It also explains why hedging activity in the futures market is at such low levels right now: http://www.pmbug.com/forum/f13/open...s-watch-gold-silver-679/index3.html#post19368

It also seems that labor costs in emerging economies have been a major factor in cost inflation, much more than energy! See for example Newmont's recent presentation: http://www.newmont.com/our-investors/events-and-presentations/events-and-presentations
Most of the major upcoming projects are located in such countries, however. That's also going to hurt profitability, too. Labor costs in developed countries are relatively stable on the other hand. But there is not much gold to be mined / discovered in such countries.

As Pierre Lassonde of Franco Nevada (FNV) explained recently, ore grades (gold grams per ton) have also been falling rapidly. Thereby the amount of material required to mine 1oz of gold has quintuppled (5x) over the last decade: http://www.gowebcasting.com/events/denver-gold-group/2012/09/10/keynote-address/play/stream/5084

Now what is this going to mean for overall gold supply and prices in the coming years?

1.) Companies will not increase production as much as it is anticipated by analysts. They've already cut exploration and development budgets.
2.) Supply is only going to grow significantly if prices outpace cost inflation. If they don't outpace costs (like during the last two years), physical is going to continue to outperform the majority of the miners. In order to have stable profits at stable production, the average mining company needs rising prices. That's an explosive setup.
3.) Royalty and streaming companies (FNV, RGLD, SAND, TSX.V: GRO, SLW) are going to be the big winners, because they're not experiencing cost inflation. They're all increasing production without the downside of cost inflation that the miners are exposed to. I predict that there will be more royalty companies going public over the next years. For more on their business models, see here:
http://www.pmbug.com/forum/f14/pm-streaming-companies-slw-business-model-665/
and here:
http://www.pmbug.com/forum/f14/pm-royalty-stocks-royal-gold-rgld-franco-nevada-fnv-1933/
4.) Gold prices are not going to fall substantially, at least not for an extended period of time. Otherwise the mining industry would experience a number of bankruptcies, followed by a massive drop in supply, followed by an increase in prices.

Final note: the situation for silver is basicly the same.

 

[DoChenRollingBearing]

Excellent, excellent piece swissaustrian! I am going to have to re-read it again this afternoon and follow the links.

Your main point makes a LOT of sense, that the "other costs" (the unseen ones) really DO matter. Great food for thought, thanks for posting! Those other costs very much matter re Peruvian gold, for example (see my new post on Cajamarca)

Another point I sort of got indirectly is:

Buy physical now! Soon as I am back, soon as I am back...

:wave:

 

[bushi]

yeah I fully agree: as long as miners are endangered species, the more bullish it is for what has been already dug out of the ground, mid/long term. I was considering widening my horizons and buying into miners (for exactly the reasons given by SA above), but after giving it some thought, I've arrived at the same conclusion: gold mining is a costly and risky business in current circumstances. With costs growing exponentially (and sure to stay the course). So instead of trying to cherry pick the companies, that MIGHT survive in such unfavorable conditions, it is better in my opinion to invest in metal itself, wait till persist difficulties bankrupt few miners. That will lead to tightened supply, and in the consequence, push the prices of metals up - no counterparty risk, direct supply-demand.

I just think, that in any reasonable scenario ahead, it is safer and more directly profitable, to keep investing in metals, rather than companies, with all the headwinds that capital-intensive companies are/wil experience. Unless you are really EXPERT in mining business, and know how to pick the best ones - than mining comps are as low, as they possibly can be...

 

[ancona]

By the time a mine becomes a producer, I mean actually blasting and digging rocks out of the earth, the mining company will have spent tens of millions of dollars navigating a whole maze of regulatory bullshit. In addition, they will have designed an environmental sustainability plan, run off plan [NPDES requirements to control turbidity, sediment, etc. in moving and still water], native species protection survey and maintenance plan, and a million other plans all designed by the NIMBY crowd and the Sierra Club knuckletards who have no stake in the production of metals nor the companies they wish to lord over.

By some estimates, even in more regulation friendly areas, it takes from eight to ten years from resource discovery through to digging a hole and processing ores. 99.9995% of people who own miners do not realize any of this. In fact, most miners shares are backed by little more than "proven reserves" found during test drilling at various sites.

When a mine does actually start moving rock, it is still a crap-shoot, because any one of a thousand things can get you shut down. Think lawsuits friends. The last remaining lead smelter in the United States was shut down last year because of laws created specifically to make it impossible to comply, therefore shutting down the smelter by statute rather than brute force. We have become a nation of special interests rather than a nation of brothers and that makes me sad. With the advent of special interest lobbies, it no longer matters if your group has twenty million members or twenty members, because if enough money is spent and enough pressure is applied, you can write your own laws and have them passed. That my friends is a fact.

Back to mining for a moment. I know a good little bit about many aspects of mining because here in Florida I have done Phase I and Phase II environmental studies at a phosphate mine, a sand and gravel mine and at several rock pits. While I agree that impacts to our environment need to be mitigated to the largest extent possible, I do not agree with the level of impunity with which many of these regulations are enforced andd how they were written. A gravel mine is little more than a hole in the ground that fills with water. Pretty straightforward and pretty simple. To open this "mine" [hole-in-the-ground] it takes about three years of permitting through about eight separate entities in the State. That's right, three years and hundreds of thousands of dollars to dig a fucking hole.

Want to know what will happen in a few years? Most of the mining in the USA will be shut completely down; regulated out of existence. There is a very subtle and quiet movement afoot in the Obama administration to institute a regulatory stranglehold over mining and forestry in this country and they are just getting started. Have a look at how many new and stupid regulations have been promulgated in this area over the last four years. Coal mining? Soon to be a thing of the past. Open pit iron ore extraction? Ibid. Tin, copper and gold mining? They are on the same trajectory. The laws will be passed so as to be retroactive which will effectively knock out all but the biggest and strongest miners. Want to know who owns them? Take a look at their boards and look at their regulatory filings, I think you will not be surprised to see a list of the usual suspects.

If, and this is a big if, we survive the next four years, the damage done may be so great as to be irreparable.

 

[swissaustrian]

The laws will be passed so as to be retroactive which will effectively knock out all but the biggest and strongest miners. Want to know who owns them? Take a look at their boards and look at their regulatory filings, I think you will not be surprised to see a list of the usual suspects.

The CEO of Newmont was repeatedly invited to the World Economic Forum at Davos. NEM is certainly one of the cronies in the game. So is Barrick (ABX). They've destroyed the mining industry in the late 1990s / early 2000s due their aggressive hedging activities.

 

[pmbug]

Fantastic write-up sa. Corroborates a lot of what srsrocco has been saying for a while now. Rising energy and labor costs and diminishing ore grades are pushing the cost of mining and there is no relief for that in sight. New (shallow / easy to mine) high grade ore deposits are not being found at a rate sufficient to counter the trend.

 

[swissaustrian]

Gold Giants Shrink to Fit as Paulson Pushes Breakup: Commodities

The 10 biggest gold companies led by Barrick Gold Corp. (ABX) spent more than $100 billion in the past 20 years buying new mines and projects around the globe. Now they’re feeling pressure to throw the strategy into reverse.

Gold Fields Ltd. (GFI) spun off most of its South African assets in February. Billionaire hedge-fund investor John Paulson is calling for a breakup of Johannesburg-based AngloGold Ashanti Ltd. (ANG) Barrick, which has 27 mines, is selling assets after an acquisition and cost overruns helped erase $27 billion of the Canadian company’s market value.

A Bloomberg Index of 14 large gold miners has lost 26 percent in the past year, worse than the 6.8 percent drop in a similar gauge of global oil companies. The gold industry, which underperformed the metal for five of the last seven years, has tried to stop the slide by ending gold-price hedges, raising dividends, building new mines and, most recently, pledging spending discipline. Spinning off or selling assets may be its next option.

“The next fad is going to be the unbundling of the majors,” said Mark Bristow, chief executive officer of Randgold Resources Ltd. The Jersey, Channel Islands-based company believes the optimal number of mines is “four or five, six at a push,” he said.

Such moves would follow the example of international oil companies that have split up to unlock value. ConocoPhillips, the largest independent U.S. oil and natural gas producer, spun off its refining unit in May, less than a year after Houston- based Marathon Oil Corp. listed its refinery network as a separate company.

‘Herding Cats’

Shareholders have grown cold on further expansion as valuations in the industry declined. The ratio of the largest gold miners’ enterprise value to their earnings before interest, tax, depreciation and amortization dropped to 6.3, less than half the multiple at the end of 2010, data compiled by Bloomberg show.

The gold-mining strategy of bulking up was led by Barrick, which became the industry leader in 2006 when it bought Placer Dome Inc. for $10.2 billion. Now operating across four continents, Barrick saw the estimated cost of its Pascua-Lama mine on the Argentina-Chile border more than double to as much as $8.5 billion and it took a $3 billion writedown on a Zambian copper mine last month.

“It’s like herding cats to manage something like that,” said George Topping, a Toronto-based analyst at Stifel Nicolaus & Co. “It’s very difficult across all those different time zones, different cultures, tax regimes, politics.”

Gold ETPs

Investors, weary of operational setbacks and soured takeovers, have turned to gold-backed exchange-traded products that track the price of the metal.

SPDR Gold Trust, the largest gold ETP, has lost 3 percent in the past year, a smaller decline than gold equities. The S&P 500 rose 11 percent and the gold price dropped 2.6 percent in the period. Gold equities are now trading at a discount to the broader stock market.

“The mining industry has lost a lot of appeal, of interest, because of poor guidance, poor delivery, over- promising, cost overruns,” said Gerald Panneton, a former Barrick executive who’s CEO of Detour Gold Corp., the operator of one mine in Ontario. The global gold-miner “is not a model that is sustainable,” he said in a March 5 interview.

To win back investors, Barrick and competitors including Newmont Mining Corp. (NEM), the second-biggest producer by sales, are promising they’ll focus on margins and containing soaring costs, rather than boosting output.

Easier Expansion

Returns will drive production, rather than the other way around, Barrick CEO Jamie Sokalsky said Feb. 25. Barrick says it will defer, shelve or sell assets that don’t meet his requirements for returns and cash flow.

“Our overriding objective is to translate the company’s strengths into higher shareholder returns and we’ll always consider opportunities to advance that objective,” said Andy Lloyd, a Barrick spokesman.

Breaking up the biggest gold producers could result in higher valuations for the parts compared with the whole, according to Stifel Nicolaus’s Topping. It would also make it easier for companies to expand output and replenish reserves, said Jorge Beristain, an analyst at Deutsche Bank AG in Stamford, Connecticut.

“There is a logic in sort of shrinking to grow, if you will, as the type of growth that they would be able to tackle would be less risky and more digestible in size,” Beristain said in a phone interview March 15.

Paulson’s Bet

Paulson, the biggest shareholder in AngloGold, last month told investors in his firm Paulson & Co. that the miner might unlock value if it were to split its business between South African assets and those outside the country, according to a letter obtained by Bloomberg News.

Armel Leslie, a spokesman for Paulson & Co., and Stewart Bailey, a spokesman for AngloGold, declined to comment on the potential split of assets. AngloGold is looking at a “range of options” to improve the business, CEO Mark Cutifani said on a Feb. 20 conference call.

Paulson’s firm is the biggest investor in the SPDR Gold Trust, according to data compiled by Bloomberg. His $900 million Gold Fund, which is invested mainly in gold stocks and derivatives, fell 26 percent this year through February, according to a client update obtained earlier this month by Bloomberg News. The fund declined 25 percent in 2012, two people familiar with the matter said in February.

Sibanye Gold

Still, there’s no unanimity that the answer to the gold industry’s plight lies with the breakup of established producers.

Gold Fields has fallen 20 percent in Johannesburg since it spun out its South African assets through the listing of Sibanye Gold Ltd. Feb. 11. The combined market capitalizations of the two companies is 17 percent less than Gold Fields’ value on the last trading day before the split. The Bloomberg Industries index of the largest producers fell 13 percent over the same period.

African Barrick Gold Plc (ABG) has also disappointed since it was spun off from Barrick in March 2010, dropping 61 percent. The African unit has been dogged by operational setbacks and struggled to meet production targets. Barrick said in January it ended talks on the sale of its majority stake in African Barrick to China National Gold Group Corp. after no agreement was reached.

Bristow Strategy

Randgold, which owns mines and projects in Africa, has risen 13 percent in New York in the past 24 months, compared with a 34 percent decline in the Philadelphia Stock Exchange Gold and Silver Index of 30 producers. The company may sell one of its smaller assets if it found or acquired “another Kibali,” Bristow said, referring to the Democratic Republic of Congo gold mine that Randgold and AngloGold jointly acquired in 2009.

“That’s a perfect value creation,” Bristow said in a March 6 presentation in Toronto. “We want to have four or five mines, we think 1.5 to 2 million ounces, and focus on the quality.”

There would probably be investor appetite for more regionally focused companies if some of the biggest miners were to split along geographical lines, Deutsche Bank’s Beristain said. That’s partly because of heightened concern about geopolitical risk in developing countries as governments seek increased royalties, taxes and other commitments from mining companies.

Geographical Split

Barrick could improve the valuation of its shares by spinning off assets in Australia and Papua New Guinea and selling its remaining 74 percent stake in African Barrick, said Tony Lesiak, a Toronto-based analyst at Macquarie Capital Markets.

Both Barrick and Greenwood Village, Colorado-based Newmont could unlock value by splitting off assets or listing mines separately and retaining a stake as a holding company that receives dividends, said Caesar Bryan, a portfolio manager at Gabelli & Co. in Rye, New York. Newmont and Barrick could also generate savings by combining their Nevada operations, he said.

Newmont declined to comment on speculation about the sale or purchase of specific assets.

“The mantra even until probably as recently as two years ago was, get out of the U.S., get out of Canada, get out of Australia, get out of the safe geographies and chase growth in emerging markets,” Beristain said. “The pendulum is really swinging back toward people questioning the value of this kind of international, almost over-diversification that we’ve seen.”

http://www.bloomberg.com/news/2013-...it-as-paulson-pushes-breakup-commodities.html

 

[pmbug]

"... ending gold-price hedges ..."

Does this mean they aren't selling production forward in the futures markets any more? Are they shifting to setting price for current production based upon actual costs to ensure profitability?

 

[MiningNut]

I think you guys are getting lost in the weeds: everything that is now happening in the PM mining business is practically *screaming* to me that the dollar price of gold hasn't even begun to move yet. In an environment where every central bank in the world is galloping towards hyperinflation, do you really believe it should cost 3/4 of an ounce of gold to dig it out of the ground? AFAIC, the X factor is what will happen in the regulatory environment, but I think we will see an upsurge towards free markets in American politics (because we've been allowing the democrats and the environmental luddites to strangle us for far too long, and what cannot be sustained, will not be sustained).

When the big adjustment comes in the dollar price of gold, all this doomsaying about the PM mining industry is going to fly right out the window. Hedge accordingly (which means, in my view, own physical and look for the best deals on gold equities).

 

[swissaustrian]

Message To all Gold Mining CEOs – A Gold Mining Predicament

April 16th, by Mark Mahaffey (Co-Founder and CFO)

The main GDX gold mining index is down 37.4% YTD and down 54.4% since the 2011 peak. It is a very sorry state of affairs.

The gold price is now down 17% YTD and clearly questions are being asked about the viability of the gold bull market. Even more worrying should be the FY 2012 financial numbers for the big miners. Using the Bloomberg function FA, you can get a quick look at the financial numbers in a basic form.


Barrick Gold FY 2012 millions
Revenue
14,547.00
Gross Profit
6,893.00
Cash from Operations
5,439.00
Capital Expenditures
-6,369.00
Free Cash Flow
-930.00


The Free Cash Flow numbers for 2012 for the other top producers were:

Newmont………..-838.00

GoldCorp……….-511.00

Kinross………….-623.00

Agnico Eagle……250.45

Yamana………..-379.94



The average gold price for the sales of produced gold in 2012 was approximately $1650 per oz. You don’t have to be a rocket scientist to understand that if the gold price is at $1400, as it is currently, then each of these miners are going to be producing at a loss. Last year we wrote a blog, Gold and Silver Mining: A Post Mortem, which highlighted the increasing costs which were crushing margins.

Well, those margins are negative now and, even if gold stays at the current price, the margins are likely going to get more negative. Some inputs like oil have fallen as well which will help, but most are increasing as inflation pressures remain. These companies are mining finite assets – they are not cyclical firms managing their business at the bad point in the business cycle looking to survive until the economy brightens. Mining all your reserves at a loss is clearly a rather fatalistic and bad business plan.

We have seen hundreds of mining executives over the years. They are a fantastic group of people working in often atrocious, dangerous conditions. Despite the numerous ‘unforeseen’ disasters in the whole mining process from discovery to production, they remain incredibly optimistic about their own project. No one expects their project to be delayed or nationalised. No one expects to pay $8 billion for an asset 3 years ago and write down $6 billion already. Most have not appreciated how much bull markets make geniuses out of idiots – not that they are idiots – but that they might be well served to be more pessimistic. To expect massive overruns on budgets and permitting times. To expect huge problems with First Nations minority groups or complex metallurgical problems. This is the norm in the mining business and not freak one-off problems.

In the late 1990s, when the nominal gold price was much lower, costs were much lower as well, and arguably margins were slim-to-negative then too. The decision taken at that time was to hedge forward production to lock in a profitable margin, no matter how wafer-thin that was. They were helped by the high interest rates of the day. With Fed Funds at 6-7%, the forward contango price curve of gold prices was severely steeper than today. Today, the 3 year gold forward price is only 2% or $25 per oz higher than spot. If hedging was an incredibly bad move 10-13 years ago with a steep contango, then it is a dead cert way to the poor house today, locking in a 100% guaranteed loss. Of course your bankers might insist on it for new finance etc, but doesn’t mean it’s smart.

Is there a Plan B? Mining company CEOs need to face up to reality.

Costs are greater than revenue at $1400 per oz gold. No matter how much we might delude ourselves that cash costs are $800 per oz and all-in costs are $1200 per oz: they are not. If they were we would see free cash flow.

Do not even think about hedging the gold price at these current levels. It is locking in a loss, one that will probably grow over time; it is akin to slavery.

As ridiculous it might sound , I believe that the only solution, apart from praying that the gold price goes immediately to $2000 per oz is to wind down production. Others might suggest warehousing gold to restrict supply coming on to the market. Whether intentionally or not, production will start to drop as smaller mining companies will fold. There are allegedly 1000 mining companies on the TSX index with less than $200k in the treasury. The most power that the big mining companies have in order to try and survive this debacle is to reduce production in any feasible way and stop supplying the physical market. This should not only be done but should be shouted from the roof tops. We need to hear words to the effect of: “We cannot produce gold profitably at these levels so we are stopping and saving our prize reserves for another cycle”.

It may not work in stopping this current rigged market rout but it has to be a better idea than hedging your way to self-inflicted penury. The at least the mining industry could hold its head up high and be in the driving seat, rather than getting mugged off by the market manipulators.

http://www.hindecapital.com/blog/me...gold-mining-predicament/#.UW1-wFn-2ZE.twitter

 

[pmbug]

Silver mining costs were discussed in this thread too:

http://www.pmbug.com/forum/f3/silver-mining-costs-2029/

 

[swissaustrian]

Barclays gets it, production costs have grown faster than prices have appreciated over the last 5 years, we are not even technically in a bull market, because miners aren't making money.
via ZH:

If Gold Was "Just A Commodity" What Would Be Its Support Price Today's bounce back in gold prices is fading into the close and as Barclays' Suki Cooper notes, despite some physical demand response to lower prices, it has not been sufficient to combat the overall decline. In the absence of support from physical buying, where does fundamental support materialize? Should gold just put on its commodity hat, instead of its increasingly more popular currency one, its cost of production should provide some guidance.

Via Barclays' Suki Cooper,

Last year, the average cost of production was $673/oz, and the marginal cost of production (90th percentile) was $1104/oz (Gold cash costs drive higher, 22 March 2013).

Assuming sustaining capex at around $200/oz, this indicates cost support at around $1300/oz, based on last year’s data; our global database encompasses 35% of global production.

Should prices dip below marginal cost, around 10% of production under our cost curve becomes cash-negative, representing an estimated 262 tonnes of cash-negative gold production globally. The bulk of this at-risk production is from South Africa, according to our database. Also putting pressure on gold prices is the acceleration of ETP outflows, which have already reached 66.5 tonnes for the month-to-date (until 12 April 2013). Nearly 320 tonnes of gold ETP holdings are cash negative below $1400/oz (assuming only those shares created above $1400/oz have been redeemed above $1400/oz, thus, this estimate is likely to be greater).

Although a reduction in mine supply would need to counter the supply from ETP outflows, this has raised the question whether producer hedging could gain traction. Hedging activity over the past couple of years has predominantly been related to project financing.

Looking at the 20-year price low in 1999, when prices dipped to $252/oz, prices traded a third above the annual average cash cost. The average cost of production was quite stable in the 1990s but has risen by an average 16% y/y over the past five years. The marginal cost of production has risen by 69% over the past five years, rising by 15.2% last year.

Our cycle average forecast is $1125/oz (which denotes the cost-driven estimate of the minimum sustainable price over a business cycle) before taking into consideration sustaining capex, therefore, given that cost pressures are rising and labor disruptions persist, from a fundamental perspective, support comes into play initially at around $1300/oz before a substantial quantity of mine production is put at risk.

------

ZH:
And of course, should the central banks of the world succeed in driving the price of gold to or below its costs of production (repressing yet another asset class into stocks) then we fear the repercussions will backfire from a combination of bankruptcies, unemployment, and as we have already seen in Africa - severe social unrest.

http://www.zerohedge.com/news/2013-04-16/if-gold-was-just-commodity-what-would-be-its-support-price

 

[pmbug]

Recently, we published a true all-in costs article that gave investors insight into the true all-in costs that miners are spending to produce each ounce of gold. After removing write-downs and exceptional costs, gold companies spent almost $1300 per ounce to extract gold in 2012. Even with these high expenditures, the industry is actually producing less gold in 2012 than in 2011 - rising costs and lower production is not a recipe for a healthy industry.

If these cost figures sound high to you, they are affirmed by Jamie Sokalsky, President and CEO of Barrick Gold (ABX), in a November 2012 speech [pdf] in Hong Kong. Mr. Sokalsky says:

These projects are costing much more to build. We know this at first hand and it is not solely for one type of commodity. It is in all resource areas: iron ore, gold, copper, etc. This is a big challenge that we have to manage and it is also going to have an impact on supply. When you add in exploration and G&A expenses, the all-in costs for the industry are approaching $1,500 per ounce. This was highlighted in a recent UBS report and compares with a figure of approximately $850 per ounce four years ago.

This means at current gold prices, many miners are barely profitable and producing gold at a loss. ...

More: http://seekingalpha.com/article/143...-looks-grim-an-opportunity-for-gold-investors

 

[swissaustrian]

Feature: Is It Sustainable To Mine Gold In This Current Price Environment?
By Alex Létourneau of Kitco News
Friday June 14, 2013 3:43 PM

(Kitco News) - After seeing gold prices plummet in 2013 and with gold miners battling high operating costs, gold companies find themselves with razor thin profit margins with the ounces they’re pulling out of the ground.

The cost to mine and produce an ounce of gold, on average, ranges from $1,100 to $1,250.. Some mines produce gold at a very affordable cost while others are now producing gold at costs that are higher than the metal is valued.

As gold rose to over $1,900 an ounce in the fall of 2011, the general thought process that accompanied the rise was that gold miners were reaping enormous profit margins.

(This information was provided to Kitco News by a mining company that wished to remain anonymous. It shows a breakdown of its current costs and how mining an ounce of gold is costing them about 1,483/oz.)

Not so, said Peter Gray, managing director of Headwaters MB, a US-based investment bank.

“Everyone thought at $1,600, $1,800 and $1,900 gold (that) all the mining companies were making profit hand over fist, but, the reality is that the capital costs of construction had escalated so significantly that the margins of production and the margin of operation were still tight,” Gray said.

“$1,300 is not a sustainable gold price. In the long term, I think it’s good that this correction happened, but for the immediate future of gold there’s going to be some systemic changes that will result as a consequence of this price environment, no question.”

On Friday April 12 and Monday April 15, gold suffered its biggest drop in 33 years plummeting over $200 an ounce in two sessions.

As of press time, spot gold was currently trading at 1389.60.

Mine-by-Mine

“You’ve got to look at it a mine-by-mine, company-by-company basis,” said Brent Cook, geologist, and founder of the mining newsletter, Exploration Insights. “At $1,300 gold, there are a lot of mines that are cash flow positive and if you just burn those out, things should be fine.

“But, the problem is every ounce they mine to stay in business, they need to replace it,” he said. “You’ve got these different cost structures, these different numbers that companies use, from cash cost to all all-in cost, etc.”

There is no concrete all-in cost figure that covers mining an ounce of gold in the mining industry as some companies report all-in sustaining costs and others report a less complete cash cost.

Goldcorp Inc. (TSX: G)(NYSE: GG), a leading global gold producer, is one of the companies that report all-in sustaining costs per ounce. Citing the company’s 2013 first-quarter results, all-in sustaining cash costs totaled $1,135 per ounce.

The all-in sustaining cost metric is a tool for measuring the actual cost to mine an ounce of gold and is being ushered into the gold mining industry.

“The all-in sustaining costs was well received by the seniors because it demonstrates that we’ve been trying to show different stakeholders that our cost is not just taking the material out of the ground, it’s much more than that,” said Brent Bergeron, senior vice president of corporate affairs for Goldcorp. “We’ve been pushing this initiative through the World Gold Council and most of the members that are there are the seniors, so, you will get a lot of them saying that it is important, because we believe over the long run that is the most important figure that you can give.

“I think it’ll get much traction from the seniors, not quite sure that juniors will get there yet,” Bergeron said.

There is a necessity for mining companies to show the actual all-in cost that goes with mining an ounce of gold given the current state of the mining industry. The general rallying cry of late for mining companies has been a ‘Back to Basics’ approach with a particular focus on cutting costs.

Cost Cutting

After 2013’s first-quarter earnings were filed by gold miners in April and May, the message was loud and clear; costs need to be cut.

“They’re cutting costs everywhere they can; capital expenditure, exploration, development, everything because they’re trying to tweak their mines to get a little more blood out of the rock, if you will,” Cook said.

While gold mining companies have been applying cost cutting measures, another serious dip in gold prices could border catastrophic for companies with mines flirting with tight, or no margins at all.

CPM Group, a New York-based commodities research firm, said gold prices could drop to as low as $1,260 if support at the $1,340 level is breached.

Rohit Savant, senior commodity analyst for CPM Group, believes that while gold could test those levels, he doesn’t expect gold miners to hit the panic button immediately.

“If the price of gold goes down to $1,280 or $1,260, which is a possibility, that’s not something that would affect supply so much,” Savant said. “It would make mining companies think about the cost, which they should be thinking about anyways at these current price levels. It really depends on how long it would stay there.

“In terms of cutting production, that’s something that mining companies tend to wait out to see how bad prices get and for how long they remain at low levels,” Savant said. “You usually don’t see mining companies switch off a mine at the first sign of weak prices and that’s mostly because they need to weigh the cost of shutting and opening that mine.”

Not all Doom & Gloom

While the steep fall for miners has been watched closely and picked apart by analysts and media alike, it’s not all doom and gloom said Peter Gray.

“It’s a function of perspective and market perspective,” Gray said. “If you’re looking at gold at a high of $1900 and a precipitous fall to $1300, that’s disaster-that is not a sustainable price. The reality is as long as you’re focusing on cost, having a longer term plan, gold is still an asset class that has tremendous upside.”

Gray suggests that now is the time for major gold producers to start acquiring strong junior and intermediate gold miners, companies that have strong projects and have already spent capital to get their operation going.

M&As

Brent Cook also sees the need for an upswing in mergers and acquisitions for gold producers.

“Over the next couple of years, they’re going to have go out and buy the very few quality deposits out there, the high margin deposits; so there will be M&A out there for sure,” Cook said. “But right now they’re faced with not much cash, really low share prices and the acquisitions that were done over the past few years have been by and large a disaster-I forget how many mining CEO’s were fired because of that.”

Bergeron said that strategies vary from company-to-company and that, essentially, gold mining companies that had a structured, disciplined strategy during the days of $1,900 gold are not suffering as much in this current price environment.

“There will be fluctuations and I think it depends on what kind of strategies that companies actually take,” Bergeron said. “And also the reaction from the market seeing what companies are trying to do; not growing with size but with quality,” he added.

Cook and Savant echoed Goldcorp’s approach to quality over quantity as a necessity for gold miners to maximize cash flow.

Unfortunately for the mining sector, the winds of change towards the positive are not yet in sight.

“I think we’ve got a long bottoming process here,” Cook said. “On the positive side this is the opportunity because we know in a year, or two years from now, that all the mining companies are going to wake up and realize their mines are dying.

“It’s a great time to start leveraging into the few great projects out there that I think make good money,” he said.

For the latest mining news, updates and commentary, or to contact me regarding a story or feedback, please follow my Twitter account @alex_letourneau

By Alex Létourneau of Kitco News aletourneau@kitco.com

http://www.kitco.com/reports/KitcoNews20130614KN_feature.html

 

[swissaustrian]

So it begins, miners are shutting down production:

Golden Minerals Announces Suspension Of Production

Golden Minerals Company (NYSE MKT: AUMN); (AUM.TO) ("Golden Minerals" or "the Company") announced that it has suspended operations at its Velardena mine as of June 21, 2013, in order to conserve the asset until operating plans and prices for silver and gold indicate a sustainable cash margin for operations. The employees at the Velardena mine were informed of the Company's decision in the afternoon of June 21, 2013. In February 2013 the Company anticipated the Velardena operations would achieve operating cash neutrality during the third quarter 2013, assuming gold and silver prices of $1,600 per ounce and $30 per ounce, respectively In May 2013 the Company projected a $5 million negative margin from the operations for the remaining three quarters of 2013 at prices of $1,500 gold and $25 silver. Metals prices have continued to decline and remain below these levels.

The Company is placing the mine and processing plants on a care and maintenance program to enable a re-start when operating plans and metals prices support a cash positive outlook for the property. Approximately 470 positions at the Velardena operations are being eliminated as a result of the suspension. The Company is presently negotiating the specific terms of a severance package with its labor unions. The Company plans to retain a core group of approximately 50 to 60 employees to facilitate a re-start of operations and to maintain and safeguard the longer term value of the asset.

...

The Company estimates payable production during the second quarter 2013 prior to the suspension of approximately 160,000 silver equivalent ounces, assuming a 50:1 ratio for gold to silver.

...

http://finance.yahoo.com/news/golden-minerals-announces-suspension-production-200600987.html

 

[swissaustrian]

And here come the layoffs by the major miners, I expect many more to come:

Barrick Gold to reduce workforce by 55 in Nevada, Utah
RENO — The world’s largest gold mining company has announced plans to reduce its workforce by 55 positions in Nevada and Utah, citing falling gold prices, rising costs and sagging stock prices.

Barrick Gold Corp. plans to slash about 40 positions in Nevada, 15 in Salt Lake City and five to 10 elsewhere in the region through voluntary severance packages to certain employees, spokesman Lou Schack said.

The Toronto-based company did not rule out further such reductions to deal with what it calls “a very difficult business environment.” Since late 2011, the gold price has fallen by $600 — over 30 percent

“As always, we will continually adapt our business to suit changing market conditions,” Schack said. “This may include further restructuring and/or reductions in the future.”

The move affects several groups of support function employees, including administrative, human resources and purchasing workers. The company has some 4,500 employees in Nevada — which comprises the bulk of its North American operations — and 140 employees in Salt Lake City.

...

Another leading gold miner, Newmont Mining Co., hinted it might lay off some employees in Nevada after announcing plans Wednesday to cut its workforce in Colorado by 33 percent. The company cited falling gold prices and rising costs as factors for considering such reductions elsewhere.

http://www.reviewjournal.com/news/nevada-and-west/barrick-gold-reduce-workforce-55-nevada-utah

 

[ancona]

I don't understand why these companies don't fucking stand up to the market and simply stop delivering product until prices get real. They could get together and have a sort of cartel meeting, set a minimum price and tell the Comex to take a flying fuck at a rolling doughnut. That's how it would work in Anconaland.

 

[swissaustrian]

I don't understand why these companies don't fucking stand up to the market and simply stop delivering product until prices get real. They could get together and have a sort of cartel meeting, set a minimum price and tell the Comex to take a flying fuck at a rolling doughnut. That's how it would work in Anconaland.

The major mining companies are part of the problem. Their world gold council does nothing against banks. Some say it`s because they depend on financing from banks.
Here`s what Bix Weir thinks about the WGC:
http://www.roadtoroota.com/public/564.cfm

 

[Aubuy]

I think it might be a mistake to think of the paper gold market or the mining companies as something corrupt. It is just another "market" where people have come to believe that the paper they are trading has the same value as the underlying metal and therefore the mining of the metal. It doesn't appear to me to be any different than fiat currency where everyone accepts that the paper currency has some kind of underlying value based on what you can buy with it. If people lose confidence in paper currency, the same thing is going to happen to "paper" gold and everybody will scramble for another medium of exchange (bitcoins, silver coins, sea shells, colored glass beads?) and then some company will still make money making money.

In any event values are determined by some combination of belief systems (keeping up with the neighbors, peer pressure, religious convictions) and "real" demand (hey I am thirsty and need some water), and sometimes the two have little to do with each other from a truly objective perspective (like if aliens from space were trying to figure out our economic system and why people prefer bottled water over tap water, or why Diet Coke is more popular the Diet Pepsi. If I were an alien I would think the human race is a little nutty.

So all we can do is try to guess what everybody else is going to do and get there ahead of the mob so we can make money too.

 

[swissaustrian]

Some of you might begin to think that I am an World Gold Council insider, because I've been talking about the issue of all-in sustaining costs months ago when I started this thread ffftt: (j/k), now the WGC has come out and officially endorsed the concept:

WGC Details New ‘All-In’ Mining Costs Metric

(Kitco News) - The World Gold Council unveiled on Thursday new metrics to measure mining costs in an effort to provide more clarity on the economics of gold mining.

These new metrics, called “all-in sustaining costs” and “all-in costs,” have been discussed by major gold miners for a while, but a complete framework detailing the added information had not been released until now.

The industry has been using cash costs to explain the cost of mine production; those cost breakdowns include mining, processing, selling and royalty costs. The new metrics from the WGC expand on the costs of doing business. The “all-in sustaining costs” is an extension of the cash costs metric and now includes the costs to sustain output, while the “all-in” costs show the different production costs over the mine’s life.

The WGC is the industry-backed group that promotes gold.

The council and its industry members started in September exploring the way to start including more of the cost structure, said Terry Heymann, director of responsible gold, World Gold Council.

The metrics are non-GAAP. GAAP which stands for “generally approved accounting principles” and non-GAAP earnings are an alternative measure of a company’s performance. These figures are usually included with a company’s required GAAP earnings. The metrics are also voluntary, but the WGC said they expect companies may start using these metrics beginning Jan. 1.

“We think these (metrics) will be helpful for investors and other shareholders to understand the full cost of mining,” Heymann said, adding that companies should be able to reconcile these costs with their required GAAP earnings without too much difficulty.

Some gold miners are already using the metrics, as Barrick Gold Corp, Goldcorp and Agnico-Eagle, among others began to mention the cost disclosures in their fourth-quarter earnings reports earlier this year.

The gold industry is going through some turmoil with the price of gold falling even as costs rise, hitting producers on both sides. The new metrics may help a company get a better sense on their costs and their margins, Heymann said.

The new metrics try to focus more how much it costs to fund existing operations and the costs of mining over the life cycle of the mine, he said. In the past, there has been some criticism of the industry of how much miners spending to sustain a certain level of production.

For full breakdown of the new metrics see: http://www.gold.org/media/press_releases/
...

http://www.kitco.com/news/2013-06-27/KitcoNews20130627DeC_updatedwgc.html