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After a two-day meltdown in the gold market, the future looks increasingly perilous and uncertain for an industry that was already facing major headwinds.
Gold miners have watched their screens in shock since Friday, as the price of the key gold futures contract has plummeted a staggering US$204 an ounce, or 13%. That is the biggest percentage drop since 1980, and even if it is temporary, it sends a strong message to companies that they need to lower costs, eliminate unnecessary capital spending and put a halt to all marginal projects.
“People are going to have to look at their all-in costs very seriously and whether they can survive or not,” said Gerald Panneton, the chief executive of Detour Gold Corp.
“Companies will cut back, companies will not put projects in production. And a lot of companies will not survive this.”
The carnage was widespread among the equities on Monday, as the S&P/TSX Global Gold index plunged 9.2%. Canada’s two big emerging producers, Toronto-based Detour and Montreal-based Osisko Mining Corp., each fell more than 20%. Detour’s market value is now less than the capital it spent on its namesake gold project.
At Monday’s closing gold price of US$1,361 an ounce, margins in the industry have become razor-thin for established producers. In fact, some analysts argue that many of them are underwater.
The industry recently introduced an “all-in” cash cost metric to try to capture the rising cost of producing an ounce of gold. It showed the costs for senior producers are between roughly US$950 and US$1,300 an ounce. But critics of the “all-in” approach point out that it does not account for corporate taxes or development capital. If those are included, the real cost of production is significantly higher.
Put simply, by driving up costs and driving down prices, the market is insisting that companies produce less gold.
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