Gold mines shuttering left and right because $1300 gold is simply unsustainable
Last August we wrote about Nick Holland, the head of South African mine Gold Fields Ltd. He was warning about the gold industry getting ‘killed’ if prices remained around the $1600 level:
The wave of rationalisation that is starting to emerge among the major diversified miners will soon spread to the gold sector, as soaring costs and labour shortages begin to squeeze margins…
…Mr Holland criticised fellow gold producers for failing to include corporate and capital costs when publicising their profit margins, saying they were only fooling themselves and governments, who would duly seek to tap the industry for more taxes.
Mr Holland said rising energy, labour and production costs would virtually double costs in the next five years, and a gold price of close to $US2000 per ounce would be needed to keep pace.
If costs remain close to $US1600 where they have been in recent weeks, much of the industry would be “killed”.
Holland was essentially saying that the rising costs of getting gold out of the ground would force some mines to shutter if the price didn’t rise to alleviate these rising costs.
Then in December we wrote about Newmont mining, one of the biggest gold suppliers on the planet, struggling to get its cost of gold extraction down:
The average cost to extract an ounce of gold by the largest mining firms jumped 23 percent to $584.70 last year, Bloomberg data show. In contrast, silver production costs fell 12 percent to the lowest since 2007….
…“Investors are very critical, voting with their feet and pushing management teams to resign,” said John Wong, a portfolio manager at CQS Group’s New City Investment Managers. “You can tell from the way investors sold Barrick down that they are on short fuses.”
Barrick’s board replaced former chief executive Aaron Regent with chief financial officer Jamie Sokalsky on June 6, saying it was “disappointed” in the share performance after costs rose and production dropped. Since then the stock has lost another 19 percent as the company missed earnings for a fourth consecutive quarter.
At least five more gold chief executives have lost their jobs this year.
We ended that article saying:
We are probably not far off starting to hear about gold mines being shuttered and new mining projects indefinitely parked which will limit the already tight supply of new gold that comes onto the market each year.
Then again in February we wrote an article titled “Is there a ‘perfect storm’ brewing in gold where central banks print like crazy and the gold supply dramatically drops?”:
So we could be starting to see a ‘perfect storm’ brewing in the gold market where central banks around the world are printing like crazy and gold mines are starting to shutter less profitable mines reducing the amount of ‘new’ gold this is coming onto the market. All VERY supportive of much higher gold prices…
…It should also be noted that if there is a centrally coordinated plan to manipulate the gold price lower this is exactly what we’d expect to see start to happen.
When you keep any price below its market rate you will get shortages of the thing that is being kept artificially ‘cheap’.
Keep a close eye on this trend for the rest of the year because it is probably going to be the main story for gold in 2013.
Freeport-McMoRan Copper & Gold Inc. (FCX)’s production in Indonesia is shut for a government probe into accidents at its Grasberg mine that may take as long as three months. A tunnel collapse on May 14 killed 28 people and another worker died on June 1 from a separate incident.
Then in the past week we’ve had the following announcements.
PERTH–Newmont Mining Corp. (Newmont Mining Corp) has cut jobs in Western Australia state as the U.S.-based gold miner joins major competitors in a push to reduce costs amid lower bullion prices.
Newmont said it cut 38 positions in Australia following a recent review, mostly in support services roles at the regional office in Perth, Western Australia’s state capital.
“As we deliver on efficiencies to ensure a stronger business in any commodity cycle, we anticipate a reduced work scope,” Newmont said.
As a result, the miner said it needed “fewer employees and contractors.”
Gold miners globally are shrinking their workforce in response to weaker bullion prices and rising costs, along with pressure from investors to improve financial returns.
Gold output in Ghana, Africa’s second-largest producer, fell 3 percent in the first quarter as prices tumbled and some unprofitable mines suspended production, said Ben Aryee, head of the Minerals Commission.
Output declined to 1.083 million ounces compared with 1.113 million ounces in the fourth quarter of 2012, Aryee, chief executive officer of the state-run mining regulator, said today in an interview in Accra, the capital
The Minera Frisco company, owned by Mexican mogul Carlos Slim Helú, reported that its El Coronel mine suspended production of gold and silver as a result of being shuttered by workers during a conflict between two rival unions. Located in the north-central state of Zacatecas, El Coronel is Minera Frisco’s biggest mine. In 2011 El Coronel produced 197,631 ounces of gold and 20,419 ounces of silver.
The cost to mine and produce an ounce of gold, on average, ranges from $1,100 to $1,250.. Some mines produce gold at a very affordable cost while others are now producing gold at costs that are higher than the metal is valued.
As gold rose to over $1,900 an ounce in the fall of 2011, the general thought process that accompanied the rise was that gold miners were reaping enormous profit margins.
Not so, said Peter Gray, managing director of Headwaters HW -1.56% MB, a US-based investment bank.
“Everyone thought at $1,600, $1,800 and $1,900 gold (that) all the mining companies were making profit hand over fist, but, the reality is that the capital costs of construction had escalated so significantly that the margins of production and the margin of operation were still tight,” Gray said.
And the kicker:
“$1,300 is not a sustainable gold price. In the long term, I think it’s good that this correction happened, but for the immediate future of gold there’s going to be some systemic changes that will result as a consequence of this price environment, no question.”
Simply put, with gold trading at $1385, many gold mines are unable to get the precious metal out of the ground and make a profit. The longer that gold trades down at these suppressed level the more gold mines are going to be moth-balled.
This will severely restrict future supply, and this is going to happen in the face of massive physical demand globally (see this this this this this this and this.). Which will lead to only one thing, shortages in physical gold at these prices. We wonder how long the paper market for gold can remain at sub-$1400 in this environment.
Link to this article: : http://www.goldmadesimplenews.com/mining/gold-mines-shuttering-left-and-right-because-1300-gold-is-simply-unsustainable-10975/