Cost-cutting far from over in gold mining biz

Stockhouse Editorial
1 Comment| August 5, 2013


(The Canadian Press) TORONTO _ Canadian miners are reining in spending to cope with plummeting gold prices, a move that analysts say is likely to hurt their production volumes several years down the road.

``Mining is a long-term business, so you want to be mindful that you don't cut out a cost today that will generate value in the future, for example, exploration,'' said Jay Patel, the mining and metals transactions partner at Ernst & Young.

Cost-cutting was the dominant theme as the big Canadian gold producers reported their second-quarter earnings over the past two weeks.

Some were forced to write down the value of their projects due to the eroded prices for gold, with Barrick Gold Corp. (TSX: T.ABX, Stock Forum) (NYSE: ABX, Stock Forum) taking the largest impairment charge, to the tune of US$8.7 billion.

Barrick , which saw its stock price ease 0.52% to $17.37 in New York Monday, said it's taking steps to lower its operating costs by laying off workers and cutting capital spending.

``We're prepared to make the tough decisions, including suspending, closing or selling assets,'' chief executive Jamie Sokalsky told analysts last week.

``While the outcome of the process could have an impact on our 2013 year-end reserves, as well as expected future production levels, where possible, we will maintain the option to access the metal in the future.''

Meanwhile, Agnico-Eagle Mines Ltd. (TSX: T.AEM, Stock Forum) (NYSE: AEM, Stock Forum) announced plans to trim expenses by $250 million over the next year and a half, while Goldcorp Inc. (TSX: T.G, Stock Forum) (NYSE: GG, Stock Forum) said it's ``aggressively'' looking for savings at its Penasquito mine in Mexico, after booking a $1.96-billion impairment charge on the project.

Analysts said the cost-cutting measures will have a positive impact on earnings in the coming quarters, but they're likely to decrease production volumes further down the road.

``Their mine plans will be dictated by near-term cash flows rather than the long-term value of the mines,'' said Darren Kirk, vice-president and senior credit officer at Moody's Investors Service.

``As a result, we expect that production will decline.''

The dramatic drop in the gold price has made some projects not profitable enough to continue, said Kirk.
Many of those projects will be put on ice as producers shift their focus to higher grade ore, where profit margins are larger.

Kinross Gold Corp. (TSX: T.K, Stock Forum) (NYSE: KGC, Stock Forum) said it's putting off deciding whether to continue with a planned expansion of its open pit mine in Mauritania until 2015.

``Frankly, the decision to not make a decision is really a consequence, more than anything, of a focus on the balance sheet,'' chief executive Paul Rollinson said during a conference call last week.

Some of the companies said they will keep less profitable projects idling on the backburner so they can restart them later, if gold prices recover.

``If it's not profitable for them to take that ounce out now, they're going to maintain that access to maybe take it out at a later date,'' said David West, a mining analyst at Salman Partners Inc.

``A lot of value in the mining industry is option value.''

West said more cost-cutting is likely to materialize during the third and fourth quarters of the year if metals prices continue to lag.

``Some companies are taking more of a wait-and-see approach,'' he said.

However, Kirk warned that some costs will be difficult to reduce.

``The challenge is that they have to reverse the inflationary pressures that have been prevalent in the industry over the last several years,'' he said.

While it'll be easy to lay off workers and negotiate lower prices with suppliers for things like chemicals and tires, costs such as labour and fuel are likely to pose a challenge, Kirk added.

But despite fears about lower production volumes in the years to come, analysts agree the cost-cutting is needed.

``The cost structures of most of these gold companies were really geared towards a gold price that was much higher than where it is today,'' Kirk said.

``It's a cyclical business, and gold producers need to be able to react to swift and sustained changes in the price of gold.''

Tags: GOLD

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wasagabeach
Seems like even the big guys like to buy high and sell low.
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August 5, 2013
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