As gold prices sank to levels not seen for two and a half years, a gloomy forecast from the World Gold Council (WGC) this week should make every investor in a listed gold miner a little bit nervous.
In its 3rd quarter outlook, the Council warned that mines in what it called “the 90th percentile” would start feeling the pain from rising costs and the weaker gold price.
In other words, the bottom 10% of mines were now seeing their All In Sustaining Cost (AISC) margins (which measure a mine’s total costs) turning negative under the influence of the continuing rise in costs and falling gold prices.
The Council said on the latest data (for the June quarter of this year) “The average AISC hit US$1,289/oz in the second quarter, another record high and up 18% year-on-year (yoy).
“General inflation increased mining costs in all areas with fuel, energy, labour and consumables all-up yoy.
“Also, some lower grade mines have (re)started after the increase in the gold price in recent years, contributing to higher average AISC for the industry.
“With higher costs and the lower gold price, AISC margins eroded further during the quarter and – for the first time since 2019 – turned negative for the 90th percentile of gold mines.,” the Council forecast.
With gold trading around $US1,632 an ounce (Thanks Fed and Bank of England rate rises), the lowest since early 2020, the amount of headroom between the market price and the average AISC is narrowing by the day.
And there has been no letup in costs pressures in the third quarter.
Newmont, the world’s biggest miner and Barrick the number two, both said in their quarterly reports this week that costs rose at a double-digit pace again in the three months to September.
Newmont said its AISC was up 13.5% at $US1,271 an ounce of gold in the, largely due to lower gold sales volumes and higher labour, energy and raw materials costs.
CEO Tom Palmer said inflation, particularly in energy, fuel and consumables costs, is coming down and he noted that labour costs “are proving to be a bit stickier.”
“Labor cost makes up half of our direct costs.” He added that Newmont is seeing an about 4% increase on average across wages. Which indicates that the company’s workers are taking ab big loss in real wages each quarter.
Last week Newcrest said the fall in gold and copper production in the September quarter because of maintenance work at most of its mines and lower grades at a couple, helped drive its three-month AISC up 23% to $US1,098 an ounce.
With gold prices down 8% in the quarter and 11% so far this year, even the biggest pain from inflationary cost pressures.
Small and medium companies are in the firing line and in Australia you only have to look at year to date share price performances to have a good idea of the 10% of local gold miners the WGC was referring to.
There have been a couple of examples of M&A activity which is always a precursor indicator of emerging pressures – Genesis buying Dacian and talking about a marriage to St Barbara about unifying mines and processing facilities in the Leonora area of the WA goldfields.
Gold Road grabbed control of DGO and its best asset, 14% (now 19.9%) of De Grey and its huge and evolving Mallina-Hemi gold prospects in WA’s Pilbara.
One other point evident from the WGC quarterly report is that the cost and price pressures have not stopped mining and gold output from growing towards what could be the second-best year ever after 2018.
This year’s mine production is inching towards the 2018 record on the back of a strong Q3 with third quarter output estimated at 949 tonnes.
That was 1% under the strongest ever third quarter mine production seen in September quarter of 2018.
Third quarter 2022 production was up 6% from the June quarter of this year due to the very long dry periods in high latitude mines in countries like Canada and a return to normal production conditions in other countries (with an absence of Covid shutdowns helping as well).
After some modest downward revisions in the March and June quarters year to date production of 2,686 tonnes was slightly below the record set in 2018, when mine production reached 2,705 tonnes for the first nine months of that year.
The WGC said that a “very strong Q4 will be needed if the FY total is to exceed the previous 2018 record (3,665 tonnes), made perhaps more difficult by first half revisions and other production interruptions.”
Lower outages in China and elsewhere are offsetting the loss of Russian output.
But the risk of further downward revisions and production interruptions may prevent 2022 from breaching the record. In addition, rising all-in sustaining costs are putting some pressure on the 90th percentile producers, whose margins turned negative for the first time in three years.
De-hedging – albeit small – presents a further marginal impediment to mine supply growth.
The 6% fall in global recycling to just under 293 tonnes in the quarter on the back of a lower US dollar gold price that is unlikely to be reversed in this quarter.
But some upside surprises may come from local price-related selling if US dollar strength continues apace, which is not our core view. In addition, a squeeze on household real incomes as inflation bites and recession risks loom also present a higher probability of distressed selling, particularly for lower income cohorts.
The Council said growth in mine supply was seen in all regions except in the Commonwealth of Independent States (CIS) region.
Central and South America had the biggest increase, up 10 tonne y-o-y, (with the absence of Covid restrictions in Chile, Peru and Argentina) followed by Asia, which increased by 9 tonne y-o-y. Aside from the 12-tonne yoy decline seen in CIS, all other regions saw smaller gains.
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This growing weakness is hitting producers hard and showing no respect for size or market clout.
Tuesday saw the number one global miner Newmont reveal a 56% slump in September quarter profit and on Thursday, the number two miner, Barrick Gold Corp unveiled a 30.1% slide.
Both giants are almost joined at the hip – they partner in a major gold mining operation in Nevada that anchors their North American businesses. Barrick Gold Corp. is the operator and owner of 61.5% of Nevada Gold Mines (NGM). Newmont owns the other 38.5%.
Barrick shares hit their lowest level since March, 2020 (as did the Comex gold price) and Newmont shares also stumbled lower to similar levels and are down more than 11% so far this week.
That’s despite both miners reporting solid production and sales performances in the three-month period.
But both companies saw big cost rises – Newmont’s rose more than 13% to $US1,271 an ounce in the September quarter from a year ago, Barrick’s surged nearly 23% (as did the AISC of Newcrest, the big Australian producer) to a similar figure of $US1,269 an ounce.
Barrick says it remains on track to achieve its 2022 production guidance, though costs will be higher.
The miner however said production at both Turquoise Ridge in Nevada and Hemlo in Canada is expected to be below the 2022 guidance range.
Barrick’s net earnings fell to $US241 million in the latest quarter, from $US347 million with a 9% fall in gold production from 1.092 million ounces to 988,000 ounces,
Gold prices fell 8% during the third quarter as global central banks raised interest rates to battle surging inflation.
Barrick’s average realised price for gold fell 2.8% to $1,722 an ounce from a year earlier, the company said.
Copper output increased to 123-million pounds, from 100-million pounds in the September 2021 quarter.
Barrick’s revenue fell 11% over the year to $US2.527 billion for the latest quarter.
Barrick CEO Mark Bristow said in a statement that Barrick remained on track to achieve its 2022 production guidance, despite some “short-term operational challenges and rising input costs”.
Barrick’s attributable production guidance for the year is 4.2-million to 4.6-million ounces at an AISC of $US1 040/oz to $US1 120/oz, and its copper guidance is 420-million to 470-million pounds at an AISC of $US2.70/lb to $US3/lb.
Larger rival Newmont Corp on Tuesday reported a 56% drop in quarterly profit, largely due to lower gold sales volumes and higher labour, energy and raw materials costs.
Newmont produced 1.49 million attributable ounces of gold (up slightly from 1.45 million ounces in the same quarter of 2021) and 299 thousand attributable gold equivalent ounces (GEO) from co-products (That’s copper, silver, zinc and lead).
With a quarter of the 2022 year to go, Newmont says it’s still on track to meet guidance of a smidge under six million ounces a year. The original guidance right at the start of this year was for 6.2 million ounces but that was hauled back with production problems early in the first quarter.
Newmont’s average realised gold price was $US1,691 an ounce in the third quarter, compared with $US1,778 an ounce in the 2021 third quarter and $US1,836 an ounce in the second quarter of this year.
Revenue fell 9% to $US2.6 billion and earnings slumped to $US212 million from $US483 million a year ago.
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And this week we saw the first failure of a gold miner in the 10% referred to by the WGC.
Canadian gold miner Pure Gold sought and gained creditor protection earlier this week as it works out whether it can survive, close or sell itself.
The move wasn’t sudden, it has been coming for much of 2022 as the board struggled to find a solution in the midst of the great surge in costs and the slide in gold prices, thanks to the very strong US dollar.
It is clear from the company’s statements this year that its finances have been strained for a number of reasons – weak management was part of the reason, but so too poor mining practices, weak finances and the rise in costs and slide in the price of gold.
It was clearly in the bottom tier of viable gold mines and if the WGC forecast comes to pass, Pure Gold won’t be the last miner in this group to fail.
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The message for Australian investors is to watch the costs and price data in the quarterly reports from local gold miners next January and the interim financial data in February.
There is almost certainly more bad news to come.
