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Gold producers, ignored as global stocks rebounded in the past two years and investors turned to exchange-traded funds that track bullion, face closing mines or shutting themselves down after the metal’s worst slump in three decades this week made 15% of miners unprofitable.
Barrick Gold Corp. and Newmont Mining Corp., the world’s two largest producers, are among companies in the FTSE Gold Mines Index that have collectively lost about US$169 billion in market value since bullion peaked in 2011. Gold equities are trading at the lowest level relative to gold in at least 20 years after the metal’s 14% plunge so far in April.
Barrick took another hit this week when the cost to insure its debt surged to the highest in four years after Moody’s Investors Service said it may downgrade the company’s bonds.
The review of Barrick’s Baa1 debt rating was prompted by a legal challenge to its US$8.5 billion project in the Andes, Moody’s said in a statement. Toronto-based Barrick is the biggest producer of the precious metal with US$7.5 billion of bonds.
This month’s futures price drop to as low as US$1,361.10 an ounce brings gold closer to the global average production cost of about US$1,200 an ounce, according to Nomura Holdings Inc. That puts producers such as Canada’s Semafo Inc. and Golden Star Resources Ltd. at risk of mine closures or “financial distress” if prices fall to that level, according to Macquarie Group Ltd. Tanzania, Africa’s fourth-largest gold-producer, said a sustained slump may shut mines there.
“Any company that hasn’t been focused on efficiencies and costs for the last three to four years is going to fail in this market,” said Gavin Thomas, chief executive officer of Sydney- based gold miner Kingsgate Consolidated Ltd.
Gold’s 9.3% plunge on April 15, the biggest one-day drop in New York since March 1980, couldn’t have come at a worse time for gold companies.
Rising Costs
Despite 12 consecutive years of rising gold prices, shareholders have lost faith in the gold-mining industry, which has seen soaring production costs and made money-losing acquisitions. Investors have instead flocked to exchange-traded funds, or ETFs, such as the SPDR Gold Trust, which are backed by bullion and track the price of the metal.
The FTSE gold index, which tracks 27 of the largest producers, has plunged 58% to Wednesday since bullion hit a record on Sept. 6, 2011. Over the same period, the MSCI All Country World Index, which tracks 2,431 global stocks, climbed 22%.
“Gold companies have underperformed the gold price for more than the past 20 years, quite simply because they make as little money today for shareholders as they did at US$300 an ounce,” Brenton Saunders, who helps manage about US$600 million at Taurus Funds Management Pty., said from Sydney.
Starved of fresh capital, smaller mining companies that carry out exploration and development were already being squeezed before this week’s price crash. There are too many companies in need of financing and there will be production stoppages as some of them cut expenses, said John Ing, CEO of Toronto-based brokerage Maison Placements Canada Inc.
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