|
 The all-in cost of producing an ounce of gold dropped by 23 percent
to $1,331 an ounce in the year to end-March, according to data from
Citigroup. The data, published on Aug. 13, covers miners producing
about half of the world's gold.
Data from five of the world's biggest gold producers, including
Canada's Barrick Gold Corp <ABX.TO>, South Africa's AngloGold
Ashanti Ltd <ANGJ.J> and Australia's Newcrest Mining Ltd <NCM.AX>,
show this trend continuing to the end of the latest quarter.
A closer look at the numbers reveal, however, that almost all of the
cost reduction is due to miners pulling easy levers: slashing
capital and exploration spending, cutting head office costs and
shrinking mine plans to focus on extracting higher-grade gold.
"Even though this is a good short-term thing for the gold sector it
is exactly the worst thing that they can do from a long-term value
perspective," said Johann Steyn, an analyst with Citigroup in
Johannesburg.
As the gold price tanked and miners were forced to write down
billions on underperforming assets, once growth-hungry investors
demanded a new era of austerity. The subsequent cuts to exploration
and capital spending threaten to shrink current output and future
growth.
When gold starts to rise again, miners will find it harder to
benefit if they have under-invested in new projects. Lower grade
ounces will again become economic, and if mined as in previous
upturns, will once again raise unit costs.
STICKY COSTS
What miners have found much harder to dent are mine site operating
costs such as labor, fuel and power, which soared 60 percent between
2008 and 2012 when demand for these inputs surged during a global
gold mining boom. Falling gold grades, which have nearly halved to
1.5 grams per tonne since 2000 as rich deposits become scarcer, have
also hiked costs.
Mine site costs, known in the industry as cash costs, fell 5 percent
to $696 an ounce in the past 18 months, quarterly data from the
world's seven biggest gold miners show, as miners cut jobs,
implemented efficiency programs and pressured suppliers.
While that represents a sharp turnaround from the cost inflation
before it also shows the difficulty of making deep cuts. And some
say this might be the end of the road.
"Most of the gains come in the first year after a company has made
major decisions on cutting employee numbers or benefits," said Sean
Boyd, chief executive of Agnico-Eagle Mines <AEM.TO>, a mid-sized
producer with mines in Canada and Mexico.
Agnico was able to slash about $40 million in costs at its Arctic
operations in the second half of 2013, mostly through reducing
employee benefits, Boyd said. "You can only do that once on the
labour cost side," he said.
Employee salaries are "sticky" and hard to reduce, said Adam Graf,
an analyst with Cowen and Co. in New York. So is the price of fuel,
which makes up about a third of mining costs and is set by the
market.
[to top of second column] |
CUTTING MUSCLE VS FAT?
Others in the industry are optimistic that miners can squeeze out
more cost cuts at mine sites from better labor productivity and
eliminating lower-grade ounces.
"There is more room to cut fat than there is muscle. I don't think
they are cutting into the muscle right now to demonstrate
profitability. The companies have been so bloated," said Chris Beer,
who co-manages the RBC Global Precious Metals and Global Resource
Funds.
And lower production is not necessarily a bad thing, especially if
each ounce is more profitable.
Although bullion prices are not always driven by supply and demand,
a drop in production could be a boon for producers as it could help
to establish a floor for the gold price, said Imaru Casanova, senior
gold analyst at U.S.-based fund managers Van Eck, a major gold stock
investor.
Bullion was last trading at $1,268 an ounce.
SEEN THIS MOVIE BEFORE
Today's capex and other cuts are similar to those that miners made
between 1996 and 2001, the last time gold was in a bear market,
Citi's Steyn said.
"That was exactly why they couldn't capitalize on the gold price
rally that came after," he said. Even though capex at the world's 10
biggest gold companies increased seven-fold between 2000 and 2013 to
$16.6 billion, production decreased 10 percent, he said.
What is different this time around is that lower gold grades have
made it that much harder to reduce mining costs.
Not all miners are slashing capex to the same degree though. At
$1,486 an ounce at end-June, Goldcorp, the world's top gold miner by
market value, has the highest all-in costs of the five biggest
miners who publish this data as the Vancouver-based company presses
on with building two mines.
"It's very easy to simply cancel or defer capital programs at a mine
site," Chuck Jeannes, Goldcorp's CEO said in an interview.
"I just know that we are being very careful not to get carried away
with cost reduction and find ourselves having not made the
investments we need to for the long-term health of the mine."
(Editing by Andrew Hay)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright
2014 Reuters. All rights reserved. This material may not be
published, broadcast, rewritten or redistributed. |
