Miners can't operate with gold below $1,500
The decision by Newcrest Mining Ltd. (NCM), Australia's biggest producer, to write down the value of its mines by as much as A$6 billion ($5.5 billion), will lead to the biggest one-time charge in gold mining history. Rivals such as Barrick Gold Corp. (ABX), the biggest producer, and Newmont Mining Corp. may be next, according to Jefferies International Ltd.
“There's going to be significant rationalizing in the gold industry,” Holland said. “You can't keep mines producing if they're losing money.”
Gold Fields's South Deep mine in South Africa is one of the few mines that could survive at the current gold price of 1,230 an ounce, Holland said. The mine's size and the fact that it's largely mechanized, meaning it's less reliant on labor demanding pay rises, will help keep costs low, he said.
The Bloomberg Research Global Mining & Exploration Index has fallen 41 percent since April 9, while gold has dropped 22.3 percent amid its biggest three-month decline on record.
Eoin Treacy's view Gold miners let costs get out of control
over the last decade and are now being brought to heel. A marginal cost of production
at $1500 is high by any standard. This suggests that the companies who survive
will be those best equipped to control costs. Writing down overvalued assets,
renegotiating labour contracts, cancelling expansion projects, managing energy
costs and lobbying governments are all likely to play a part in this process.
The
NYSE Arca Gold BUGS Index decline reflects
the sector's poor fundamentals but it has fallen to such an extent and is so
short-term oversold that potential for at least a relief rally has increased.
A break in the progression of lower rally highs, currently near 300, would be
required to break the medium-term downtrend.
According
to its 2012
annual report RandGold Resources has
a total cost per ounce of between $700 and $750. The company increased its dividend
this year by 25% and yields 0.77%. The share has halved since October, but found
at least short-term support in the region of 4000p last week and an unwind of
the oversold condition appears to be underway.
Franco
Nevada as a royalty company is also noteworthy at this stage. The share
currently yields 2% but has an admirable dividend growth rate averaging more
than 30% over the last five years. The share halved between September and the
end of June but found at least short-term support last week and an unwind of
the short-term oversold condition appears to be underway.