As prices remain under pressure from an imminent interest rate hike by the Federal Reserve, gold mining companies are coping with the need to pay down debt acquired during the recent boom, and in some cases, just trying to survive.
Gold Miners in Distress
Even the best of the gold miners, such as debt-free Randgold (NASDAQ:GOLD; LON:RRS), are having to cope with a lower gold price. Even though they mined a record 305,000 ounces of gold last quarter, profit dropped 26%. Another large gold miner, Goldcorp (NYSE:GG; TSX, SWX:G), is still losing money, despite cost-cutting measures. High production costs in old South African mines are hampering Harmony Gold (NYSE:HMY), which has an all-in sustaining cost of $1040 an ounce. By increasing production like many others are, Harmony is generating enough cash flow to pay down debt.
Labor unrest, especially in South Africa, is another factor that is pressuring gold miners. Sibanye Gold (NYSE:SBGL) is dealing with a strike threatened by the militant labor union AMCU, who refuses to accept the deal that other unions agreed to. This comes after two mine fires and seismic activity at a third mine cut the company’s output.
The situation can be more precarious for the “junior” gold miners, who often have to go “all in” on a single project. Sometimes, they can strike it big, as Richmont (TSX:RIC) did with the Island Gold mine in Ontario. They found more high-grade deposits deeper in the established mine. The surprises can be unhappy as well, as another Canadian gold miner, Rubicon (TSX:RMX), found out. The initial surveys of the Phoenix gold deposit underestimated the complexity and variability of the veins. The true state of the deposit wasn’t discovered until drilling had started.
Selling and Streaming
The large gold miners, who went on an expansion and acquisition spree during the last gold boom, are now shedding mines, and even selling ore production in advance, for money up front. Called “streaming,” these companies give miners a lump sun up front, which gives them the right to buy a guaranteed percentage future gold production at a large discount.
Barrick Gold Corp. (NYSE, TSX, SWX:ABX), the world’s largest producer of the metal, is struggling with $12.9 billion in debt. It has responded by selling several mines. It recently announced that it was close to selling a package of six U.S. properties, and was close to meeting its goal of reducing debt this year by $3 billion. Like most majors, Barrick has increased production and lowered production costs, partially by “high grading” its mines. This practice targets only the richest veins in a mine, and leaves the rest.
Glencore (LON:GLEN) has used both asset sales and streaming contracts to cut its debt, as well as shutting down unprofitable copper and zinc mines.
Merge or Die?
While junior gold miners being forced to merge or be bought out is a common occurrence, talk is growing that some of the majors are going to have to merge or die. This will involve shutting down or selling marginal properties and cutting workforces in order to bring operating costs down. Reuters reported this summer that mergers and acquisitions in the gold mining sector amounted to $3 billion, just in the first five months of the year.
While the shakeout in the gold mining sector continues, it should leave the survivors in position to keep costs low until the next bull market in gold.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.