Gold firms plan drastic cuts to stay afloat as bullion sinks

November 7, 2014 Posted by admin


To make ends meet at a lower price, producers have already cut exploration and corporate costs in the past year, and many have relied on high-grading, which means focussing on areas with higher quality metal to reduce unit costs.

A fall in oil prices and a weakening of currencies such as the South African rand against the dollar also have offered some breathing space, with companies’ costs priced in rand and sales in dollars.

But reforms now must become more radical.
“I don’t really see on the operating side, the unit cost side, much more room for meaningful impact,” said Phil Russo, mining equity analyst at Raymond James. “The ability to meaningfully change all-in costs will have to come from the capital side. Whether they might under-capitalize operations or defer capital is really the theme of the day. Dividends will surely be under review.”

Kinross Gold has scrapped its dividend in the past year, and this week it said weak prices may derail the planned expansion of its Tasiast mine in Mauritania.

AngloGold Ashanti is looking to sell assets to shore up its finances after shareholders forced it to abort a plan to spin off part of its mines and raise capital in September.

Barrick Gold is also looking to divest assets to help repay its high level of debt.

South Africa’s Harmony Gold suggested on Wednesday it might have to cut jobs as it contends with depressed prices.

“We are seeing this clear separation between the gold companies. Those that use a conservative price assumption like Randgold, that are low-cost and have little debt or very profitable operations, can service that debt even at these prices,” said Neil Gregson, portfolio manager at JP Morgan Asset Management.

“Others that are either high cost or that took on a lot of debt in the bull market like Barrick will now have to sell assets.”


Things could get even uglier.
If gold prices persist around $1,100, companies could see their credit lines withdrawn or reduced. Those with heavy debt may be forced to hedge revenue or raise distressed equity, and companies such as AuRico, Detour, Iamgold, Lake Shore and Pan American may be forced to scrap dividends, according to RBC.

At $1,000 many could be forced to accept discounted takeover offers or other dilutive measures for equity holders, according to the bank.

“There may be some consolidation in the space – some guys getting together and trying to pool assets to turn around and run a more efficient business model,” said Joseph Fazzini, an analyst at Dundee Securities in Toronto. “I think that is the best way that these guys can make sense of the industry at this point in time.”

But the medicine for a quick recovery could kill the patient in the long run. Emergency cuts in both exploration and operating capital could result in a steep output decline later on and threaten the existence of a mining firm.

“The bigger problem is that if they cannot afford to reinvest and explore, there will be a sharp drop in production a year or two from now,” said Meryl Pick, an equity analyst at South African fund Old Mutual.

“If current prices persist we may see more shafts going onto care and maintenance.”

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