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TORONTO (miningweekly.com) – For more than two decades, gold miners have tried to conduct business using a model regarded by several analysts as fundamentally wrong, a model whereby miners aim to grow yearly revenue at all costs, driven by increasing output and replacing reserve and resource bases.
However, despite much higher gold prices for over a decade from 2003 onwards, declining output, stagnant or dwindling reserves and resources, negative earnings and massive asset write-offs have proven that this business model is an abject failure, author of the Mercenary Geologist website Mickey Fulp tells Mining Weekly.
He says that, for them to produce more ounces at increasingly lower margins, gold miners cannot generate sufficient cash flow to meet the real costs of producing gold. “Mining is a value industry. It is not, and has never been, a growth industry,” he stresses, pointing out that, since the most recent bull market started in 2003, most of the major producers have failed to be profitable.
He advises that, in order to reach sustainable profitability, gold miners must adopt a core philosophy of producing only those ounces that return strong margins and must stop trying to grow production and reserves in order to placate analysts and investors when they release the next earnings statement.
Given this new paradigm, gold production will increase when gold prices are higher and decrease when gold prices are lower, Fulp speculates.
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