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A decrease in the Gold price To $1,000 per troy ounce would be a real bloodbath for the gold mining sector. That Said Mark Bristow, the CEO of Randgold Resources, during the presentation of the mining company's latest quarterly results. "The gold mining sector is clearly at its wits' end at a gold price of $1,140 per troy ounce. A drop to $1,000 would be a bloodbath."
Bristow said during the earnings presentation that demand for physical gold is still strong, but the sector has not learned any lessons from the cyclical market they are in. As a result, many gold mines today bring their product to market at a loss, after years of trying to increase production.
According to Randgold's CEO, many gold miners have taken a gold price of $1,300 per troy ounce as a starting point. That seemed like a safe margin when the price of the precious metal rose to a record level of more than $1,900 per troy ounce in 2011, but it is now causing problems. Many mines have started new projects in recent years based on a much higher gold price. With a gold price of $1,140 per troy ounce, these projects are often no longer profitable.
We should not expect an increase in the gold price in the short term, according to the CEO of Randgold. "The $1,300 gold price is behind us and the big players in the market will struggle to repay their creditors at the current price". According to an analysis by Citigroup, three-quarters of all gold mines make a loss when the gold price is below $1,200 per troy ounce, when you calculate the all-in cost. This cost also includes indirect costs such as depreciation, permits, exploration, financing costs and the like.
"Everyone in the industry is now starting to see that the music has stopped and that there are only a limited number of seats. It remains to be seen whether the large companies in this sector will be able to stay afloat without a new injection of liquidity. Everyone is trying to survive this phase in the hope that the gold price will soon start to rise again."Bristow told Reuters.
Unlike most other commodities, the price of gold is not dependent on supply and demand fundamentals. Instead, the price reacts much more to global economic factors, such as interest rates and inflation, as well as investor sentiment. That makes movements in the gold price difficult to predict.
Gold mines in trouble with even lower gold price
Gold mining stocks are even more volatile than gold itself. In the bull market of gold, the gold miners achieved a higher price return, but now they are also going down much faster. According to portfolio manager Angelos Damaskos of the Junior Gold fund, many projects in the gold mining sector will be put on hold if the low gold price continues for a longer period of time. Producers have already implemented several cost-cutting operations in recent years, but even that cannot be sustained indefinitely. If gold miners have to sell part of their assets and reduce exploration costs to a minimum, this will have the effect of reducing their production in the long run.
Kinross Gold already scrapped its dividend last year and announced this week that one of its gold mines in Mauritania will not be expanded due to the low gold price. AngloGold Ashanti plans to sell assets as its shareholders did not support the plan to spin off part of the company and make a new share offering.
Barrick Gold also has to sell some assets, as this mine is facing a very high level of debt. South Africa's Harmony Gold announced this week that more jobs may be cut.
For Randgold, the future looks a little brighter. This mine has relatively little debt and has mines in its portfolio that can still produce profitably at the current gold price. Randgold's direct cash costs are $692 per troy ounce, one of the lowest in the industry. "Our company is set up in such a way that we can still make a profit at a gold price of $1,000 per troy ounce, while other mines need that level to survive", according to director Bristow.
