The latest decline in the price of gold is saddling higher-cost producers with losses on every ounce mined, and pushing others to the brink of also slipping into the red.
Gold fell to a four-year intraday low of $1,137.10 an ounce today, below production costs for seven of 19 mining companies tracked by Bloomberg Intelligence, including Harmony Gold Mining Co., South Africa’s third-largest producer, and Primero Mining Corp. (P) Two more producers are within $50 of the figure.
“What’s developing is almost a two-tier type of market,” John Ing, chief executive officer at brokerage Maison Placements Canada Inc., said by phone. One tier has companies with good assets and lower costs, while the other comprises producers “who are saddled with high-cost operations” and stretched balance sheets.
“Investors are looking through the so-called carnage and are holding onto the top tier and are dumping the second tier,” he said.
The seeds of the industry’s predicament were sown during gold’s 12-year bull-run, when it rose to a record $1,923.70 an ounce in New York in 2011. Mining costs were allowed to spiral “out of control” and mines were built assuming high prices, said Mike Schroder at Old Mutual Investment Group in Cape Town.
Producers “were all looking for volume rather than value when the times were good,” said Schroder, who helps manage 574 billion rand ($52 billion) in assets. “Now they’re paying for that.”
Gold Index
As gold prices fell 4.7 percent last week, the Standard & Poor’s/TSX Global Gold Sector Index of 40 producers plunged 16 percent. About a third of worldwide output is probably cash-flow negative with gold at less than $1,250 an ounce, according to Joe Wickwire, who manages the Fidelity Select Gold Portfolio.
Gold futures fell 1.9 percent to settle at $1,145.70 an ounce. The S&P/TSX gold index declined 4.3 percent to the lowest since November 2001.
There are producers making money at current prices. In the third quarter, so-called all-in sustaining cash costs were $834 an ounce for Toronto-based Barrick and $711 for Englewood, Colorado-based Alacer Gold Corp. The measurement includes the expense of mining and replacing reserves through exploration, as well as other costs like corporate expenses. Not all mining companies calculate this figure the same way, and not all companies report it.
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