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Could Miners Boost Gold Prices?

Supply will Soon Dwindle...

Written by Brian Hicks
Posted July 1, 2013

Gold is in a free-fall, and gold miners are casting about for solutions.

Take Barrick Gold Corp. (NYSE: ABX) and Kinross Gold Corp. (NYSE: KGC), for example. According to Moody’s, Barrick has an implied bond rating of Ba1 versus its actual rating of Baa2, while Kinross has an implied rating of Ba1 versus an actual rating of Baa3. All of this happened while bullion slipped below $1,200 an ounce.

This will be gold’s first yearly drop since 2000, and the mining companies are acutely aware of the implications. Barrick is speedily shedding assets and slashing spending to develop a buffer of sorts. The company had $12.5 billion in net debt as of the end of March and through April sold $3 billion in bonds to raise liquidity.

gold barsBut the long-delayed and well over budget Pascua-Lama project is likely to cause further debt before all is over. Thus, Barrick’s bonds are down by 12 percent since the beginning of May, according to Bloomberg.

Meanwhile, Goldcorp Inc. (NYSE: GG) has seen its notes fall by 9.4 percent, while Kinross has seen a drop of 7 percent. Altogether, the top 50 issuers have collectively lost 9 percent on average.

Gold has been falling nearly unchecked. Futures in New York as of June 27th slid below $1,200 for the first time since August of 2010, finally settling at $1,223.70/oz on the Comex.

The clearest sign of things to come issued from Nick Holland, CEO of Gold Fields. BullionVault quotes:

"The industry is not sustainable...where the gold price is at the moment. We're going to need at least $1500 an ounce to sustain this industry in any reasonable form."

Well, there you have it. The World Gold Council has also gotten in on the salvage operations, issuing “all-in” and “all-in sustaining” guidance for gold mining production costs. While the latter focuses on current production, the former looks toward new exploratory projects as well as licensing and capital issues.

Under the terms of the new guidance, the cost of gold mining would, on average, be $1,400/oz. All this comes amidst a flurry of consolidations and write-downs throughout the mining sector. Indeed, gold miner shares are now down 40 percent for the year altogether. While Dubai is seeing shortages in supply to meet sizable demand, the more major gold markets—India and China—have scaled back on their purchases.

With gold prices falling with no end in sight, stock prices reeling, shareholders unhappy, and major funds curbing their outlook on gold, what are gold miners and their investors and shareholders to do? Part of the problem is that many massive projects were begun in the heyday of gold, and now they hang like albatrosses around gold miners’ necks.

See, for example, Barrick’s Pascua Lama. Numerous smaller gold companies are gasping for breath, since much of their operations relied on the fact that gold was worth more than (and I mean well above) $1,000 an ounce.

More expensive technologies that were being tried out by gold miners, such as diamond core drilling, are now being shelved rapidly. Many producing mines are seeing their operations suspended on a temporary basis until production becomes more viable.

 

Global Gold Supply and Demand

What’s interesting is that demand is rising in the Middle East even as prices crater. Will that be enough to offset the major ETF unloading that’s in progress right now?

The London Bullion Market Association said, for example, that last month’s demand from India and China completely offset western ETF sales. And for May, members of the association indicated there was a rise of 17 percent in the volume of gold dealt via London, taking it to a 12-year peak.

And even as average gold prices worldwide have fallen by about 4 percent, the daily average in gold bullion transactions is up 11 percent or more.

So we have a scenario where gold stockpiles could begin to dwindle soon. Gold production from mines might taper off as companies continue to rationalize their operations. But if demand stays steady, might that not push prices back up, much as platinum is seen as a hot investment right now due to South African mining strikes?

It seems reasonable to assume, but that banks on continued demand. Historically, gold has never really been out of favor, so take that into account.

 

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