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The free fall in gold prices spells more bad news for an industry already fighting cost overruns, asset writedowns and project cancellations.
Gold dropped to its lowest price in two years on Monday, reaching $1,361 (U.S.) an ounce, driving the Toronto Stock Exchange gold index down nearly 10 per cent as shares of major producers sank to 52-week lows.
The crumbling gold market is raising fears that industry profits will be extinguished as the price of gold closes in on the cost per ounce required by many companies to produce the metal and replace their reserve base.
“Costs are rising faster than gold and if gold isn’t rising, then producers are in trouble,” said Pawel Rajszel, an analyst with Veritas Investment Research Corp. in Toronto, who calculates the all-in, sustaining costs of producing gold at around $1,100 (U.S.) an ounce on average.
“It’s the story of the decade and nobody noticed because gold prices were going up,” Mr. Rajszel said. “Now that gold prices are going down, you see who’s swimming naked as the tide falls.“
As gold prices soared over the past decade, production costs were marching higher as well.
Prices for equipment, materials, labour and energy soared as mining and energy firms competed for the same resources and supplies amid an industry frenzy of mine construction and expansion. While much of that cost burden lingers, the selling price for gold is in sharp retreat.
Barrick Gold Corp., the world’s largest gold producer, projects all-in costs of $1,000 to $1,100 per ounce for 2013. The all-in cost, or sustaining cost, reflects a company’s cash operating costs plus the estimated spending to replace reserves. Kinross Gold Corp. had all-in costs of about $1,100 per ounce for 2012 and forecasts that the figure will rise to between $1,100 to $1,200 per gold ounce sold this year. Mid-size producer Agnico-Eagle Mines Ltd. expects all-in costs this year of about $1,075 per ounce.
For Iamgold Corp., the all-in cost already outweighs the gold price, according to Mr. Rajszel. He estimates that all-in costs for Iamgold, a Toronto-based company with half its mines in Africa, are $1,417 an ounce. Iamgold said it doesn’t have an all-in cost available because it is still working to define final guidelines on how it should be calculated.
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