We are about to enter the reporting season (yearly, quarterly, half yearly) for the world’s major miners, including gold producers who will prove to be the source of much angst and financial pain for investors large and small.
In fact investors will get a nasty reminder than when it comes to investments, gold miners run a poor second to the metal they search for and mine.
Like it or not, it’s a well known ‘secret‘ in the markets that gold miners have underperformed the price of gold for years – including in the current down phase.
The collapse in the share price of Newcrest Mining in Australia since the ill-fated merger/takeover of Lihir in late 2010 provides convincing evidence of the value-destroying efforts of many of the biggest names in this sector
Newcrest’s shares have plunged from around $A42 in late 2010 to around $11 yesterday, and lower last month.
Continuing production problems, the rising Australian dollar, rising costs, and the recent fall in gold prices have helped undermine the share price.
And, while gold prices peaked well after the merger (in September 2011), Newcrest missed that boom, thanks to those continuing production problems.
As a result Newcrest has announced around $A6 billion in impairment charges and other writedowns in an attempt to clean up its act and re-position the company as a leaner, lower cost producer.
But it hasn’t been alone in this financial ‘confession‘ process. Barrick has lopped $US4.5 billion to $US5.5 billion off the cost of its big mine development in Peru and Argentina and AngloGold Ashanti announced impairment charges of between $US2.2 to $US2.6 billion earlier this week. And they won’t be the last.
Some London-based mining analysts reckon writedowns and impairment charges will top the $US20 billion mark in the current reporting season in Australia, South Africa, London, the US and Canada.
US analysts say companies are likely to follow Newcrest in abandoning dividends, or reducing them – they point out for example, that industry major for example Newmont, has linked its dividend to the gold price, which means a lower or no payout.
Some analysts wonder if the intensifying pressures on gold producers from the weak price and rising costs won’t see more smaller and medium sized miners collapse, as Australian-based Apex did last month (it was worth around $A400 million at its peak a few years ago, but has just faded away).
And the rebound in gold prices in the past three weeks won’t help miners such as Newcrest, Barrick or Newmont or its shareholders or other producers.
The metal closed around $US1,285 overnight after making a run at $US1,300 an ounce and rebounding in the wake of Fed chairman Ben Bernanke’s latest attempt to calm the same markets he made nervous in May and June about when the Fed’s big easing spending will start being reduced.
Gold prices are down around 25% so far this year (it was over 30% in June) thanks mostly to the realisation that the Fed will have to abandon its easy money policies one day.
Analysts point out that the slide in the Newcrest price and the prices of other miners such as African Barrick Gold has been larger than the fall in the price of gold. Newcrest’s price is down nearly 75%, and African Barrick by a similar amount.
Investment demand is falling, despite higher purchases by many central banks. Exchange traded funds are seen as net sellers for as long as the price remains weak.
Demand from India is being choked off by that country’s government and central bank who are concerned at how a flood of gold into the country has been destabilising the balance of payments and the rupee.
China remains solid but the intensifying anti-graft and corruption crackdown is seen as forcing people to curtail their gold purchases. China is supplying much of this demand from its position as the world’s biggest gold producer.
And, purchases of gold by small investors has slumped sharply in the past two months after April’s big burst of activity.
For a gloomy outlook for the industry and its prospects, Nick Holland Gold Fields CEO reckons the industry will be smaller in five years than it is now.
He told the Minweb website this week that the outlook for the sector is grim, and gold production will very likely shrink over the next five years.
"Now we’re down to prices below $1300 and as you’ll see I think over time as people report that is below the all in cost of producing an ounce of gold for the sector. So the sector is under water at the moment.
"I think the industry is going to shrink further and I think the one positive of this kind of measure and where the gold price is today is that I think it’s going to clean up the industry and a lot of the marginal production that shouldn’t really have been brought in to play or built is going to disappear and we’ll get more supply discipline into the gold industry over time" he said.
"The other thing is wage inflation across the world has been much higher than CPI in most countries. You look at South Africa, wage inflation over the last five to ten years is probably 5% higher than CPI on average. The compound effect of that is huge and we’ve seen decline in productivity. Decline in productivity and wage hikes beyond inflation are not a good recipe if you repeat it year after year and that’s one of the reasons why the South African industry I think is in decline and has been in decline for some years now.
"I think we will see a further decline in the gold industry worldwide for some of the same reasons that we’re seeing in this country.
"Financing has dried up, banks are not willing to lend to distressed companies, particularly juniors, the equity markets haven’t been available to them, they’ve had to just close up shop and try and just retain the optionality. Things have got cheap and yet they still haven’t been bought.
"That probably tells you that things could get cheaper again before they go up. So all of this is going to feed in to a declining profile going forward and a lack of replacement of what’s being mined now. So watch out over the next five to ten years we are going to see a contraction in supply in the gold industry from the plus-minus 68m ounces we’re mining now, I think it will be a lot lower in five years than that," Mr Holland said.
Normally the sort of contraction he is talking about would be seen as being bullish for gold and the gold price. But in the current doom and gloom his predictions are falling on deaf ears. But for how long?
