Citi on gold miners: A Leopard Cannot Change Its Spots

"The fact that gold companies tend to burn cash in good or bad markets to us accentuates the industry’s poor fundamentals," says the team at Citi, noting the "easy levers" on cost cuts have been pulled, but 75% of the industry is still cash-flow negative at today's gold prices.

Besides, cutting capex and exploration costs is nice for next quarter's margins, but what happens to production and unit costs longer term (hint: one falls, the other rises)?

"Whether or not they cut capex, we see both scenarios as bad for cash flow delivery and shareholder returns, longer term. Increasing head grades in order to boost near-term results (a practice that has become common over the past year) should also have detrimental effects longer term. There seems to be no easy way out."


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Comments (22)
  • Doug Eberhardt
    , contributor
    Comments (4828) | Send Message
    Leopard Cannot Change Its Spots? That's right. For some reason the National Debt clock never goes down!


    And we're not Japan. Only acting like Japan after the initial contraction. They just haven't told the stock market yet.


    Market makers having a little fun at the gold bugs expense at present. They do this with Netflix, Apple, Google. Gold is no different. It will rebound at some point too. And it will rebound big. But there is some pain still to come. Bounces of course providing fake outs.
    29 May 2014, 09:11 AM Reply Like
  • Interesting Times
    , contributor
    Comments (15146) | Send Message


    We have missed your comments on my Blog. Everyone is welcomed . Hope to see some newbies. Here is the link to my latest chapter.



    Hope to read you all soon !! We are different..
    29 May 2014, 05:50 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (11220) | Send Message
    Gold miners may be terrible businesses but they remain one of the few deep values left in this market.


    If a 1983 Toyota Tercel is being sold for $10 I'll buy it even though its a terrible car.


    The measure of value and quality mean nothing until you've attached a price.
    29 May 2014, 09:28 AM Reply Like
  • bigbenorr
    , contributor
    Comments (1174) | Send Message
    Hey the 83' Tercel was a BEAST!! That was my first car and its worth at LEAST $25.
    29 May 2014, 09:33 AM Reply Like
  • DeepValueLover
    , contributor
    Comments (11220) | Send Message
    Bam!!...I've more than doubled my money in less than 10 minutes. ;)
    29 May 2014, 09:39 AM Reply Like
  • Stock Market Mike
    , contributor
    Comments (3652) | Send Message
    If it still drives, your 83 Tercel has a value of $200 or more up here in BC, Canada.



    29 May 2014, 10:37 AM Reply Like
  • indianamark
    , contributor
    Comments (2202) | Send Message
    It was still probably a better car than my '62 Corvair.
    29 May 2014, 11:30 AM Reply Like
  • User 16336642
    , contributor
    Comments (58) | Send Message
    So that must mean that the miners are stupid or the price of gold is artificially low relative to production costs.
    29 May 2014, 09:46 AM Reply Like
  • David at Imperial Beach
    , contributor
    Comments (4381) | Send Message
    Miners aren't stupid, but sometimes they don't act rationally and get into a business they can make money at. Mining is kinda like farming. There's no money in it to speak of most years, and it's hard work, but if you're in it voluntarily you're doing it because you love it too much to do anything else.


    The average AISC (all in sustaining cost) to mine gold is currently estimated to be $1200 per ounce. Some mines are less costly to mine, others more. Even at $1200 per ounce, miners are constrained by lack of access to capital to finance any expansion.


    In Q1 supply from miners and recyclers was exceeded by demand by 26.4 tonnes which had to be supplied by manipulators in order to hold the price down to about $1300 per ounce.
    4 Jun 2014, 11:30 PM Reply Like
  • PM's Rock
    , contributor
    Comments (188) | Send Message
    Another Precious Metal hit piece. Talk about hypocrisy. Citi is the leopard that doesn't change its spot. What a joke. When every investment and banking firm screams sell, you should probably be buying the miners. Rest assured they are waiting in the wings to either buy, or want to keep the printing press churning out those devalued dollars. The east will soon have all the gold, maybe they can pick up the miners on the cheap also. The USA will have nothing left to sell before we begin to practice sound monetary policy.
    29 May 2014, 09:48 AM Reply Like
  • David at Imperial Beach
    , contributor
    Comments (4381) | Send Message
    Don't get mad at Citi for telling the truth (for once). It's not a problem with gold miner management. The problem is that gold is inherently a boom-or-bust commodity to mine.


    When there is a shortage of gold, then investors buy up miners and they can suddenly issue new shares to finance new projects or new spending at existing projects to get at lower quality ore. The new spending results in higher production which goes partly into the hands of long term hoarders and partly in to the hands of short term investors and speculators and manipulators.


    Then, suddenly supply starts outstripping demand. Investment demand for gold just as suddenly stops and reverses and there's a massive sell-off by speculators. The price drops below the cost to produce at the newest projects and they have to be closed down (or operated at a loss). The price may even fall enough to put some miners out of business. But eventually the low prices cause non-investment gold demand to pick up the slack and the cycle starts all over. This is the point where we are now.


    There's really not a lot a mining company's management can do to mitigate against such market dynamics. They really only have access to capital when there is a shortage of physical metal, and the demand peaks suddenly, violently, and without warning.
    4 Jun 2014, 11:56 PM Reply Like
  • Pharmacokinetics
    , contributor
    Comments (423) | Send Message
    @David at Imperial Beach
    Yeah, I agree with most of what you're saying, but I think gold and gold miners have hit a bottom. Gold miners are trading close to March 2009 levels (ground zero for the equity universe as a whole). They're just so badly beat up already. And gold? The prices are manipulated...physical gold demand is outweighing supply. Secondary market makers in gold exchange (London Fix) are covering the rest of the demand to keep gold artificially low at $1,300; lower gold prices bodes well for confidence in the equity market. Think about it. Ultralow interest rates make bond yields pathetically low, and perceived faltering in the gold market make it unattractive. Where else can investors put their money? Equities! QE also helps push money towards equities. I suppose banks would prefer to incur losses by selling underpriced gold in order to make even larger gains in equities; this will eventually become unsustainable once the secondary market runs out of supply for new buyers...and the new buyers will have to go directly to the mines to buy gold. At that point, the miners can set higher prices on their output, as the secondary market becomes less of a presence. I also dislike looking at ETFs like GLD because they paint the speculative activity in gold prices and not the true investment activity; investors (and central banks it seems too with enormous Russian and Chinese acquisitions as of late) buy physical gold, and traders buy GLD.


    Positions: Long NUGT
    5 Jun 2014, 01:03 AM Reply Like
  • Anon5311
    , contributor
    Comments (40) | Send Message
    Hmmm....So Citi are saying that no matter where the gold price gold miners will forever be poor. So basically never buy gold miners. These are the same bandits that said iron ore prices will remain low forever in March....a new normal/paradigm, just when it hit it's lowest point and bounced from there. I'm not a bottom picker, but these are pretty strong statements.
    29 May 2014, 10:02 AM Reply Like
  • Retired and loving it
    , contributor
    Comments (738) | Send Message
    This is a good piece of research but it is hardly news. Gold mines have been operated in such a fashion for at least 75 years. The only thing that has ever kept a gold mine alive has been a rise in the price of gold. With a stable gold price all gold mines are basically parked cars. They simply can't increase their production without buying new mines (finding a new discovery is a rare event). Typically they pay far more than the mine is worth and they destroy further value.


    In the end gold miners like gold itself exist simply because people are pretty sure the price of gold will always rise over time. Maybe it will...and maybe it won't.
    29 May 2014, 10:18 AM Reply Like
  • trader_v
    , contributor
    Comments (6) | Send Message
    It seems like the "team" at Citi just went short the miners. The are obviously not considering supply and demand. Of course based on their logic, gold could go to $250 even with miners stopping production all together.


    ""easy levers" on cost cuts have been pulled, but 75% of the industry is still cash-flow negative at today's gold prices."


    The above statement clearly shows that they are biased and believe that the price of gold is not justifiable at these levels. No mention of who determines the price in the market and why the price is currently at these levels? And why not suggest ways to pull "hard levels" as they put it, so that gold can be mined at $100 per ounce?


    What a "team"!
    29 May 2014, 10:19 AM Reply Like
  • AF1951
    , contributor
    Comments (35) | Send Message
    Trader_v, very good comment. Lower gold production will result in scarcity and gold price can jump to a level not commensurate with production decrease. This is discounted by Citi.
    29 May 2014, 11:15 AM Reply Like
  • 26175913
    , contributor
    Comments (15) | Send Message
    Leave it to one of the manipulating banks and one of them that caused the bubbles that we currently sit in to come up with this load of crap when there is more demand for gold than anytime in history and they're trading paper BS tens of times the annual gold production on paper everyday pushing the price wherever they want so they can rip everyone off and make all the contracts expire out of the money. The Barclays trader was just a sacrificial lamb...this is a systemic problem with the morally destitute bankers and traders from Wall Street to the Comex to London. You're just a bunch of scamming criminals and when the SHTF...I hope you get drug out into the streets and receive your just reward!
    29 May 2014, 01:03 PM Reply Like
  • Interesting Times
    , contributor
    Comments (15146) | Send Message
    Silver below $19 bucks long term is a screaming buy. Think physical !


    By it and forget about it for now...
    29 May 2014, 05:43 PM Reply Like
  • turville
    , contributor
    Comments (70) | Send Message
    Anon 5311 - you said quote


    "These are the same bandits that said iron ore prices will remain low forever in March....a new normal/paradigm, just when it hit it's lowest point and bounced from there."


    And where do you think iron ore is today versus March this year -take a look at these futures which are pretty close to cash. fallen off a cliff my friend. DOWN more than 18% this year alone!!

    30 May 2014, 03:38 AM Reply Like
  • 6151621
    , contributor
    Comments (1172) | Send Message
    Summary seems like oversimplified analysis. These analysts don't have a crystal ball and likely don't care. Banks as a rule are flow traders so they really don't care or invest that much in the long-term. Things like this can lead to major failures like Lehman Bros. Gold seems like it wants to go lower for whatever reason. And yet miners do close mines and cut overhead (fire miners and support staff) which can lower AISC even as production is cut. Maybe Citi didn't get the full playbook (or maybe they don't really know or care).
    30 May 2014, 07:12 AM Reply Like
  • Pharmacokinetics
    , contributor
    Comments (423) | Send Message
    The trends Citi mentions about burning cash in good years and bad years is already priced into the equities at present day. Obviously, these expenses show up in announced EPS, so investors/traders already KNOW about this. Gold miners have bottomed out; if you look at the miners, they are trading at the prices they did in March 2009, right after the 2008 financial crisis (i.e., ground zero for the stock market for our generation). Seriously, how much more can miners get beat up? Is there a more hated asset class now than gold and gold miners? Given that purchases of physical gold are brushed under the rug by mainstream media (and all the focus is on some ETF like GLD that is uncharacteristic of the gold market), the long-term indicators are far more bullish than bearish. Gold wasn't even trading close to $1,200/ounce in March 2009 and gold mining equities are priced the same then as they are now!
    2 Jun 2014, 06:40 AM Reply Like
  • 6151621
    , contributor
    Comments (1172) | Send Message
    @Pharma: If you look at GLD holdings in moz. it's back to the late 2008 - early 2009 level. And yet the price of gold is a lot higher. In one way this is bullish and in another it could be bearish. I do agree that GLD is only a small piece of the gold market: it's the more speculative type of gold.
    2 Jun 2014, 07:18 AM Reply Like
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