(Reuters) – Deep cost cuts have helped to restore profits at gold miners pummeled by a one-third slide in bullion prices in the past three years, but the fix may only be short term and could be setting the industry up for even more long-term pain.
The all-in cost of producing an ounce of gold dropped by 23 percent to $1,331 an ounce in the year to end-March, according to data from Citigroup. The data, published on Aug. 13, covers miners producing about half of the world’s gold.
Data from five of the world’s biggest gold producers, including Canada’s Barrick Gold Corp, South Africa’s AngloGold Ashanti Ltd and Australia’s Newcrest Mining Ltd, show this trend continuing to the end of the latest quarter.
A closer look at the numbers reveal, however, that almost all of the cost reduction is due to miners pulling easy levers: slashing capital and exploration spending, cutting head office costs and shrinking mine plans to focus on extracting higher-grade gold.
“Even though this is a good short-term thing for the gold sector it is exactly the worst thing that they can do from a long-term value perspective,” said Johann Steyn, an analyst with Citigroup in Johannesburg.
As the gold price tanked and miners were forced to write down billions on underperforming assets, once growth-hungry investors demanded a new era of austerity. The subsequent cuts to exploration and capital spending threaten to shrink current output and future growth.
When gold starts to rise again, miners will find it harder to benefit if they have under-invested in new projects. Lower grade ounces will again become economic, and if mined as in previous upturns, will once again raise unit costs.
STICKY COSTS
What miners have found much harder to dent are mine site operating costs such as labor, fuel and power, which soared 60 percent between 2008 and 2012 when demand for these inputs surged during a global gold mining boom. Falling gold grades, which have nearly halved to 1.5 grams per metric ton (1.1023 tons) since 2000 as rich deposits become scarcer, have also hiked costs.
Mine site costs, known in the industry as cash costs, fell 5 percent to $696 an ounce in the past 18 months, quarterly data from the world’s seven biggest gold miners show, as miners cut jobs, implemented efficiency programs and pressured suppliers.
While that represents a sharp turnaround from the cost inflation before it also shows the difficulty of making deep cuts. And some say this might be the end of the road.
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