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Another steep drop in gold and silver prices is forcing mining companies to look at severe cost-saving measures that would have been unthinkable at the start of the year.
When bullion plunged 13% in two days back in April, miners evaluated contingency plans they would adapt if prices continued to weaken. Those included major production cuts, dividend cuts, layoffs and mine closures.
With gold sinking another 6.4% on Thursday to below US$1,300 an ounce (along with an 8% drop for silver), those contingency plans no longer feel like such a longshot. Numerous analysts have warned that if prices fall much below US$1,200 for a prolonged period, even the large companies would consider large restructuring initiatives.
Many gold miners have curtailed capital spending, delayed projects or both. However, some development companies are already starting to overhaul their business in more dramatic ways. It is a potential sign of things to come if the bear market gets worse.
One example came this week, when Ottawa-based Orezone Gold Corp. tossed out its entire development plan for a project in West Africa and replaced it with a cheaper option that has a better shot at being financed.
“We’re probably one of the first to come out and say the [bear] market is obvious,” chief executive Ron Little said in an interview. “You may not like us slowing down or changing direction, but this is in the interests of long-term shareholder value.”
Companies with existing cash flow and a suite of mines are in much better shape to weather the downturn, but even they have to worry if prices continue to sink. Barrick Gold Corp., Newmont Mining Corp. and Kinross Gold Corp. are potential candidates for credit downgrades, according to analysts, while higher-cost producers such as Iamgold Corp. will struggle to generate much positive cash flow. And investors are concerned about emerging producers Detour Gold Corp. and Osisko Mining Corp., which are single-mine companies with low-grade deposits and limited financial flexibility compared to more established peers. Shares of both miners have been decimated this year.
Thursday’s sell-off pushed the price of the key gold futures contract down to US$1,286.20 an ounce. It has plummeted 23% so far this year and 32% from its peak in 2011.
Martin Murenbeeld, chief economist at DundeeWealth, noted that there was a large mid-cycle correction in the 1970s gold bull market in which the price dropped 47%. If that happened today, then it would bottom out at around US$1,000.
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