VANCOUVER – (Reuters) – The price of gold, down more than a third in three years, is approaching the tipping point where the mining industry would see a spike in the number of producers reducing output or even shutting down operations.
Several mines globally have already suspended output in the past 18 months, but not as many as industry watchers expected as producers focused on slashing costs and reworking mine plans to extract more profitable, higher-grade ounces.
But with bullion’s slide this week to a nine-month low of $1,208.36 an ounce, those defenses may not be enough. “$1,200 is a critical level. The industry has geared itself around $1,200,” said Joseph Foster, portfolio manager at institutional investor Van Eck Global. “If it falls below that level, then there are a lot of mines around the world that are really going to struggle.”
Van Eck is a major investor in Barrick Gold Corp and Goldcorp Inc and a top shareholder in most other large gold producers. Production cutbacks and mine closures would spell more financial pain for producers and investors, who have watched gold mining stocks slump 67 percent since September 2011.
And cuts and closures could be swifter and deeper than in the last gold bear market as most miners this time around have not offset the risk of potential losses by hedging – the practice of selling gold forward at a fixed price.
At the end of June, only a tiny fraction of production – around 129 tonnes – was hedged compared with the last bear gold market in the 1990s when hedging peaked at around 3,000 tonnes. The practice fell out of favor when hedged producers were unable to capitalize on rising gold prices between 2000 and 2012.
“TERRIBLE, HORRIBLE PRICE”
In response to weaker bullion, gold miners are estimated to have slashed their all-in cost of producing an ounce of gold to an estimated $1,350 in the first half of 2014, according to data from Thomson Reuters’ GFMS metals research team. That was down from $1,696 an ounce for full-year 2013.
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