COMMENT: Taking a sharp knife to gold miners

Cut, cut, cut. As market factors cut the price of gold, so miners are struggling to cut the cost of producing it, shaving away with staff cuts, asset sales, operating costs, and closure.

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Commodities

Cut, cut, cut. As market factors cut the price of gold, so miners are struggling to cut the cost of producing it, shaving away with staff cuts, asset sales, operating costs, and closure.

The gold price has fallen to four-year lows. Now it is struggling to boost itself up from US$1,142/oz on Nov. 5 to about US$1,165/oz at noon on Nov. 11. Is this the start of an upward trend or is it merely a small blip on a continued downward spiral? No one knows.

Despite strong demand from Asia, the gold price just seems to go nowhere. The strengthening American dollar is also exerting downward pressure on the price of gold. The result is that few optimists are singing gold's praises these days.

Gold miners were an enthusiastic group as the gold price ran up to US$1,924/oz. Margins were understandably high and producers focussed on getting as many ounces out the door as possible to take advantage of the price. But the next year, 2012 saw a softening and the seeds of the current problems were sown. The price continued to slide, and a year later the industry took write downs in the neighbourhood of US$26 billion.

The low price is particularly alarming as small producers on the high end of the cost curve report all-in sustaining costs at US$1,200 and more. Many mid-tier producers are bumping up against the US$1,100 ceiling. Only the largest, lowest cost producers are seeing any hope of profit.

Executives are now forced focus on returns and free cash flow. They are guiding their companies on various paths to kick-start growth.

Barrick Gold and Kinross Gold fired their chief executives and hired new ones to help them woo back investors.

Kinross has shelved the expansion of its high cost Tasiast mine in Mauritania.

Eldorado Gold is said to be looking for a buyer for its four Chinese projects, and hoping to get US$1.5 billion for them.

IamGold is withdrawing from the World Gold council and other corporate memberships.

Maudore is closing the Sleeping Giant mine in Quebec, and one would expect other marginal operations to go the same way without a gold price recovery.

The third quarter saw many miners struggling to control production costs, meet guidance and rein in debt. Investors are not impressed, and they are voting with their wallets. Share prices for Barrick, Goldcorp, Yamana and Agnico Eagle fell after their Q3 reports were made public. Analysts are suggesting that investors see no way for gold miners to cut costs further except by trimming production. They are also watching nervously lest ratings agencies ponder downgrades.

About the only upside for gold miners as the year hurtles to an end, is that weaker local currencies and dropping oil prices will help curb production costs … and that's not enough.

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