As the global economy floats along, still in the wake of the recession, there remains a considerable level of vulnerability in some locales (e.g. China, Greece) that threaten the stability of the whole. Although gold often performs well under such uncertainty, a circumstance which has not been uncommon even as global markets have recovered somewhat, the bear market for gold has persisted nonetheless.
Since 2011, gold prices have been falling with gold mining companies in tow. Miners have been finding it difficult to maintain the same profit margins they enjoyed when the gold price averaged closer to $1,400/oz just two years ago. July saw spot gold reach as far as $1,077 per ounce, its lowest in five years after prices had been steady in $40 range above and below $1,200/oz for much of the preceding year. Following a particularly rocky past month for gold and funds tied to gold, Canada’s Yamana Gold (NYSE:AUY) suffered more substantial losses in the sector this week, with shares dropping by 1% on Tuesday alone.
Mining Strikes Unresolved
Platinum prices, which long kept pace ahead of gold until late last year, have also fallen precipitously as it tends to track with the other precious metals. Platinum has also traded well below the gold price (sometimes by margins of $100 per ounce or more) during 2015.
Both before, during, and after this slump, several platinum mines have experienced strikes as a result of workers demanding better compensation. In South Africa, the largest miners have been forced to make concessions to their workers under pressure applied by the two biggest workers’ unions. Companies have started to offer workers pay raises that track above inflation. They are also willing to reduce the wage-deal term from five years to three, offering hope for new negotiations sooner if market conditions improve. Chamber of Mines’ lead negotiator, Elize Strydom, released the following statement:
“We believe this is a generous offer which is above inflation and at the limit of what this industry can bear whilst remaining sustainable. It is our final offer, and we hope our employees will accept it so we can move forward together to confront the challenges the industry faces.”
Nevertheless, union workers in South Africa appeared hesitant to accept the latest wage offer presented to them, and continue to strike. The longer these mines stay idle, the more future platinum supply outlooks go into a shortfall.
Coping Through Capex Cuts
In order to counterbalance the declining value of gold and platinum, many mining companies have initiated the reduction of capital expenditures (capex). For instance, companies have suspended exploration for new deposits and expansion of existing mines in an effort to maintain profitability by cutting costs.
In its second quarter results announcement Barrick Gold Corporation (NYSE:ABX; TSX:ABX), the world’s largest gold miner in terms of output, cut its dividend by 60% and said it will embark on a program to sell off more mines and make deeper cost cuts. McEwen Mining (NYSE:MUX) stood out after posting $13.4 million in earnings for their second quarter, compared to roughly half that during Q2 of 2014, year-over-year.
Resorting to High Grading
Another popular strategy has been “high grading” as a means of surviving the turbulent economic climate. High grading occurs when miners rely on accessing sections of the orebody that contain the highest grade of gold. To put it in simpler terms, miners are essentially reaching for the cream of the crop. The process leads to cheaper costs per ounce for the mine, for a time. Through this practice companies are able to maximize profits, at least as long as metal prices stay subdued. However, the gains to be made in high-grading could prove to be short-lived.
The practice may well have negative consequences for these companies in the future if the short-term strategy is employed too liberally: miners may be depleting the richest reserve deposits now to sustain themselves and weather the current storm at the expense of future growth endeavors. Essentially, extracting the highest-grade veins now will render the recovery of the low-grade veins uneconomical once the “best of the best” has been exhausted. In the pursuit of immediate cash flows to offset falling gold prices, mining companies are perhaps hindering their own future productivity, while also dampening the prospects for potential investors and current shareholders who remain long on the sector.