Gold And Silver Miners: 2 Changes In The Fundamentals

Includes: ABX, AEM, CDE, FSM, GDX, GG, HL, NEM
by: Simple Digressions

Most of the precious metals miners have already published their third quarter's results. Due to low gold and silver prices, these results indicate that 2013 will not be a good year for the whole sector. Many miners have been forced to record significant impairment charges. One of the most spectacular examples is Barrick Gold Corp (NYSE:ABX), which suspended construction of the Pascua-Lama mine on the border of Chile and Argentina. In effect, for the nine months ended 30 September 2013, the company recorded $5,164 million of impairment charges for that project only (the total amount of impairments, including Pascua-Lama, is $9,345 million).

In that very hard economic environment many miners have to cut their expenses and limit spending. In this article I would like to focus on "General and Administrative Expenses" and "Exploration Expenses." The data are taken from the last quarter reports of seventeen various companies (for example Barrick Gold, GoldCorp (NYSE:GG), Agnico Eagle (NYSE:AEM), Newmont Mining (NYSE:NEM), Hecla Mining (NYSE:HL), Coeur Mining (NYSE:CDE), Fortuna Silver Mines (NYSE:FSM)). Due to a broad spectrum of the miners (big, medium and small ones) these data should be representative for the whole sector.

First, let us look at the exploration expenses. The chart below shows the exploration expenses incurred by the miners on a quarterly basis. To make these numbers comparable, in the years 2008 - 2012 I took the average quarterly exploration expenses (*).

($ thousands)

source: Simple Digressions

* - exploration expenses capitalized are not included

As the chart shows, the exploration expenses, since their bottom in 2009, were steeply going up until 2012 when the companies incurred the expenses at the record amount of $409 million per quarter. Then, in 2013, the miners started to cut their expenses and now, in third quarter 2013, these expenditures are 39% lower than in 2012. I do not know whether this is the bottom in the exploration expenses but let me make one remark. The exploration activity seems to be the lagging indicator for the miners' stocks prices. The bottom of the previous cycle in stock prices was printed in October 2008 while the exploration expenses were still going lower into 2009. If the pattern repeats, we could have seen the bottom in the current stock prices cycle while the exploration expenditures have some room to go down even further.

Secondly, let us look at the general and administrative expenses. The chart below shows the numbers constructed in the same way as the exploration expenses.

($ thousands)

source: Simple Digressions

As the chart shows, the top in G&A expenses was reached a little bit later than the top in the exploration expenses. The explanation of that fact needs further study but it seems that it is easier to cut the exploration expenses instead of laying the labor force off or cutting wages. If that is the truth, this is a big minus for the whole sector. Since first quarter 2013 G&A expenses have been in a moderate decline and now, at the end of the third quarter, G&A expenses are 12% lower than in the first quarter.


Due to relatively low gold and silver prices, the precious metals miners are cutting expenses and spending. The exploration and G&A expenses are the examples of this process. While cutting G&A expenses is generally positive for the miners, much lower exploration expenditures should be perceived as a very negative factor for the whole industry. When ore grades are lower than in the past and the chances for new big deposit discoveries are falling, the lower exploration activity is a big challenge for many miners. Probably some of them will fail and become the targets for more effective miners.

But on the other hand, what is bad for some miners could be beneficiary for gold and silver prices. Less exploration activity limits the supply of precious metals and puts a floor under the metals prices. And then, the most effective miners could be the big winners.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.