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 Several mines globally have already suspended output in the past 18
months, but not as many as industry watchers expected as producers
focused on slashing costs and reworking mine plans to extract more
profitable, higher-grade ounces.
But with bullion's slide this week to a nine-month low of $1,208.36
an ounce, those defenses may not be enough.
"$1,200 is a critical level. The industry has geared itself around
$1,200," said Joseph Foster, portfolio manager at institutional
investor Van Eck Global. "If it falls below that level, then there
are a lot of mines around the world that are really going to
struggle."
Van Eck is a major investor in Barrick Gold Corp and Goldcorp Inc
and a top shareholder in most other large gold producers.
Production cutbacks and mine closures would spell more financial
pain for producers and investors, who have watched gold mining
stocks slump 67 percent since September 2011.
And cuts and closures could be swifter and deeper than in the last
gold bear market as most miners this time around have not offset the
risk of potential losses by hedging - the practice of selling gold
forward at a fixed price.
At the end of June, only a tiny fraction of production - around 129
tonnes - was hedged compared with the last bear gold market in the
1990s when hedging peaked at around 3,000 tonnes. The practice fell
out of favor when hedged producers were unable to capitalize on
rising gold prices between 2000 and 2012.
"TERRIBLE, HORRIBLE PRICE"
In response to weaker bullion, gold miners are estimated to have
slashed their all-in cost of producing an ounce of gold to an
estimated $1,350 in the first half of 2014, according to data from
Thomson Reuters' GFMS metals research team. That was down from
$1,696 an ounce for full-year 2013.
Even so, Citibank estimated last month that 40 percent of the gold
industry was burning cash at an all-in cost of $1,331 an ounce. But
that was at a gold price of $1,290 an ounce. Bullion was last
trading at $1,217 an ounce on Wednesday.
"How many guys are going to get up and say this is a terrible,
horrible price and we can’t survive at this price? Because we
can’t," Doug Pollitt of Pollitt & Co, a Toronto-based brokerage
firm, said at the annual Denver Gold Forum last week.
Industry participants were loathe to single out specific operations
that could cut or shut down production but high-cost mines are at
greater risk.
For example, Iamgold Corp and AngloGold Ashanti Ltd's Yatela mine in
Mali had all-in sustaining costs (AISC) of $1,910 an ounce in the
quarter to end-June. The operation halted active mining in 2013 due
to high costs and weak gold prices but continues to process
stockpiled ore.
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"This year, as the gold price continues to remain below $1,300 per
ounce, we are considering bringing an end to the movement of ore
onto the stockpiles and to just continue to leach the ore already on
the pad until 2016," Iamgold spokesman Bob Tait said in an email.
Other high-cost producers include St Barbara Ltd's Simberi gold mine
in Papua New Guinea, which reported AISC of A$2,300 ($2,039) an
ounce in the June quarter. An engineering program is underway at
Simberi to improve plant performance.
Iamgold's Rosebel mine in Suriname had AISC of $1,216 an ounce in
the three months to end-June.
SUPPORT FOR GOLD PRICES
To be sure, some in an industry known for its optimism see a
proverbial silver lining: they believe that a sharp drop in
production will help to lift prices.
While gold is also a financial asset that can benefit from
uncertainty and inflation fears, some investors and executives say
less supply cannot help but put a floor under bullion.
Miners will remain loathe to invest in new projects at gold prices
below $1,500, said Douglas Groh, a portfolio manager at Tocqueville
Asset Management.
"Two years from now end-2016, 2017 and even into 2018, the markets
will recognize that there isn't new capacity coming on stream ...
Certainly the gold price will jump," Groh said.
For Goldcorp CEO Chuck Jeannes, the industry is close to "peak
gold," an expression that means production is at its all-time high
as deposits get harder to find as existing production gets mined
out.
"I don't think that we will ever mine as much gold as we do in 2015.
That's positive for the gold price," he said in an interview.
(Editing by Jeffrey Hodgson and Marguerita Choy)
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