Why all is not well for gold miners like Barrick and Kinross

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Sep. 30 2014, Updated 4:00 p.m. ET

Gold miners’ performance

The price of gold plunged by 28% in 2013 and the gold mining index fell by 50% in the same year. As the above chart depicts, with the great gold price fall of 2013, stocks like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), and Kinross (KGC) were down from their peaks in 2012. They’ve been sliding since then.

Declining profitability

Only the producers with the lowest costs are making decent profits. At cash costs of $1,100 and $1,200 per ounce and with gold prices remaining in a narrow range of $1,200 to $1,350 per ounce, most gold producers are taking losses.

Structural issues miners face

Gold mining stocks across the board are facing structural issues.

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  • Lack of new discoveries: The “easy gold” in safe and easily accessible locations is gone. Now it takes much more time on average for mines to go from discovery to production. According to SNL Financial, time increased to 11 years for 57 mines from 1996 to 2005 and to 18 years for 111 new mines between 2006 and 2013.
  • Deteriorating grades: Pierre Lassonde of Franco-Nevada Corp. (a gold-focused royalty and stream company) recently quipped, “The next cut-off grade is dirt.” The ore grade for the ten largest gold operations is less than one-third of what it was five years ago at just 1.1 grams per ton. The more troubling aspect is that this decline is very difficult if not impossible to arrest.
  • Input cost hikes: Input costs—namely labor, energy, and equipment—have risen dramatically after the gold price rally that continued for 12 years and ended in 2013. Costs also increased because the new project locations are situated in not-so-easily-accessible areas, adding to workers’ wages and other site charges.

Costs are now very difficult to curtail beyond a point for long, so miners will only become profitable if gold prices rise in response to demand and other macro-economic factors. Gold-backed ETFs like the SPDR Gold Trust (GLD) are also a good way to get exposure to gold.

To read more about drivers affecting gold prices and investing in gold, see Market Realist’s guide to investing in gold.

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