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It is going to be ugly. The only question is how ugly. The mining earnings season kicks into full gear this week, and investors and analysts are bracing themselves for a set of painful second-quarter results. Writedowns, project deferrals and plummeting profits will all be front-and-centre as the miners try to make sense of one of the most turbulent quarters they have faced in years.
The sector is full of new CEOs, and the market will be watching closely to see how they respond to the challenges. Many of them are under intense pressure to cut costs due to shrinking margins.
Of course, the majority of the pain will be felt in the precious metals sector. The average gold price plunged 13% in the second quarter to US$1,414 an ounce, marking the single biggest quarterly decline since 1980. Silver did even worse, falling 22% to US$23.33.
What matters for mining companies is not the average quarterly prices but their realized selling prices, which are based on when they sell their material. And that is one potential problem.
Greg Taylor, a vice-president and portfolio manager at Aurion Capital Management, said there are rumblings gold miners “got cute” and held off on selling their product when gold fell sharply in mid-April because they anticipated much higher prices later in the quarter. Those prices never materialized; in fact, gold had another steep correction in June.
f gold miners were still withholding sales at that point, they had no choice but to sell at depressed prices if they wanted to record the revenue in Q2. In that scenario, their realized prices would be well below the average price.
“It sounds like this could be an absolute disaster,” Mr. Taylor said.
One company, First Majestic Silver Corp., suspended silver sales during the second quarter “in an attempt to maximize future profits.” It is possible that other companies elected to hang on to unsold inventory as well, especially if they withheld sales early in the quarter. The Vancouver-based company reports Aug. 13.
Writedowns will also be an important theme to watch in gold. Barrick Gold Corp., which reports Aug. 1, is expected to take a charge of up to US$5.5-billion on the botched Pascua-Lama project, and the company is conducting more impairment tests in light of the decline in prices. TD Securities analyst Greg Barnes predicted Barrick could record close to US$10-billion of writedowns. Additionally, Kinross Gold Corp., which reports July 31, will take a US$720-million charge after giving up on the Fruta del Norte project in Ecuador.
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