Not a good time to be a gold miner
After rewarding investors with capital gains for 12 consecutive years, gold will be posting its first annual price decline since 2000. Moreover, this year's annual price decline will be the biggest in 32 years. As a result, 2013 has been a difficult year for gold investors and even more so for gold producers. Compared to a 28% drop in gold price, the stock price of Newmont Mining (NEM) tumbled by almost 50% in 2013.
The company is susceptible to declining gold prices as it generated 92.5% of its first nine months' revenue from gold sales. In the first nine months, the company realized an average gold price of $1,442 per ounce, or oz, compared to $1,649 per oz realized during the same period in 2012. During this period, the company's gold revenue declined by 16.5%, of which 70% was merely due to a decline in gold prices. Further, the company's average realized gold price in the fourth quarter will be lower than the $1,442 per oz it realized in the first nine months, as gold prices have averaged $1,255 per oz during this period. Thus, the company's fourth-quarter revenue will remain under pressure due to the lower gold price.
Apart from affecting revenues, the decline in gold prices has led to huge asset write-downs, resulting in enormous losses to gold companies. Newmont calculates its gold reserves assuming a long-term gold price of $1,400 per oz, which was reduced from $1,500 per oz in the second quarter. This change in assumption led to an asset write-down of $1.77 billion in the second quarter. One of Newmont's peers, Barrick Gold (ABX), also reduced its long-term gold price assumption from $1,700 per oz in 2012 to $1,300 per oz in the second quarter, causing asset write-downs of $9.34 billion since the beginning of the year.
More asset write-downs to follow?
Looking at the pessimism surrounding the bullion, with Nouriel Roubini expecting gold to drop to $1,000 per oz by 2015, I expect 2014 will be no different from 2013 for gold producers. The gold price is expected to average $1,200 per oz next year, which will give no respite to gold miners. Going by the forecast, a number of gold miners will be forced to reduce their long-term gold-price outlook in 2014. Newmont's gold-price assumption of $1,400 per oz looks pretty distant from current levels, and the company will likely be forced to take asset write-downs in the near term, thereby reducing earnings. Even though asset write-downs are non-cash expenses, and do not affect a company's cash flow, they do signal that the company will not generate as much cash as it was expecting earlier from those impaired assets.
Factors within the company's control
The average gold price realized by gold miners is largely beyond their control. Therefore, in a low-price environment, it becomes even more important for gold producers to operate at lower costs. The all-in sustaining costs, or AISC, are a standard metric used by gold miners to report all costs incurred to discover, develop, and sustain gold production. Below Newmont's nine-month AISC is compared with that of Barrick on a year-over-year basis.
9 months 2013 AISC ($ per oz)
9 months 2012 AISC ($ per oz)
$1,125 per oz
$1,163 per oz
$919 per oz
$998 per oz
In terms of AISC, Barrick has displayed better operational efficiency in the first nine months, successfully reducing AISC by 7.9% year over year. Barrick's lower AISC is mostly due to its operations in North America and South America that reported AISC of $798 per oz and $769 per oz, respectively.
To optimize portfolios, gold companies are selling higher-cost mines. Barrick and Goldcorp (GG) want to sell their respective stakes of one-third and two-thirds in the Marigold mine. The mine reported an extremely high AISC of $1,604 per oz in the first nine months, most likely prompting the decision of stake sale. Earlier, Barrick completed the sale of its three higher cost mines in Australia to Gold Fields (GFI). These mines reported an AISC of $1,145 per oz in the first half of 2013, much higher than Barrick's overall AISC of $931 per oz. I think the sale of these mines will help Barrick and Goldcorp lower their overall AISC in the coming quarters. Following the same strategy, Newmont sold its Midas underground mine to Klondex Mines (OTCQX:KLNDF) for $83 million and expects the transaction to be completed by early 2014. This is one step by Newmont towards asset optimization, and the company will likely have to take more concrete measures to reduce its production costs.
With depressed gold prices and high operating costs, I would like to see companies that operate at lower debt levels as it gives them increased financial flexibility. Below, I compare the debt position of Newmont with that of Barrick and Goldcorp.
Operating cash flow (TTM)
(in $ million)
Total debt (mrq)
(in $ million)
Cash flow coverage
On the basis of cash flow coverage ratio, both Newmont and Barrick appear to be highly risky. On the other hand, Goldcorp has generated better cash flows with respect to its total debt.
Compared to Barrick, Newmont operates at a higher AISC, thereby affecting its profitability. Moreover, Newmont's debt level is too high, reducing its financial flexibility. With the gloomy price environment and high interest burden, I expect Newmont to post subdued earnings in the near term. Also, sooner rather than later, the company will lower its long-term gold price assumption, causing asset write-downs. I do not expect a turnaround to happen soon.