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The gold mining industry is in crisis. Prices are sinking. Mines are bleeding cash. Management teams are frantically trying to decide what to do.
One option, of course, is to simply shutter money-losing mines. Not only would this stop the bleeding, but it would also be very helpful to the overall gold market. Investors would love to see a vast wave of mine suspensions that could reduce supply and prop up prices.
Except, according to experts, there is almost no chance it will happen anytime soon.
This past week was a brutal one for gold, which sank 4.1 per cent to US$1,086 an ounce as the U.S. dollar continued to rally. Gold hasn’t been this low since early 2010, and it’s down more than 40 per cent from the high of US$1,900 that was reached four years ago.
At the current price, hundreds of mines that used to generate massive cash flow now operate on razor-thin margins. And many others are deep in the red.
According to the gold consultancy Metals Focus, a staggering 25 per cent of global gold production is underwater at a price of US$1,100 an ounce. And that number may understate the problem. The 25 per cent estimate is based on a popular cost reporting measure called “all-in sustaining costs,” which generally excludes taxes and interest costs. Once those are factored in, the real cost of mining gold is even higher.
Nearly all the senior mining companies have at least some mines that are bleeding cash at today’s prices, and some companies are struggling to make any money at all. Kinross Gold Corp. expects all-in sustaining costs of US$1,000 to US$1,100 an ounce this year, while Iamgold Corp. expects them to be between US$1,075 and US$1,175 an ounce. If prices don’t go up, those companies have real problems.
And yet, almost no one in the industry wants to think about closing mines.
It comes down to costs. Put simply, it is cheaper to keep a mine open and lose a certain amount of money than to spend a lot of money to take it out of commission.
“Higher-cost mines have got to be shutting down here, in my opinion,” said Pawel Rajszel, an analyst at Veritas Investment Research. “But if your (costs) are close to the gold price, the decision is probably to keep going because of the cost of shutting down.”
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