Gold Majors Not Out Of The Woods Yet With 3Q Results On Deck – Analysts It was a horrific second-quarter for gold producers, and, while cost discipline has come to the forefront to shore up producing costs and renew profitability, there may be more pain in store for the major players. Following gold’s historic drop in mid-April, major gold producers saw a whopping total of $23 billion in impairments on their assets in the second quarter alone. So, what’s in store for these major gold producers when third-quarter results start rolling out, beginning the week of Oct. 21? “My expectations for some of the larger majors, who have strategic positions in commodities or for the diversified industrial producers, will have higher production volumes but not necessarily higher profitability,” said Peter Gray, managing director at Headwaters MB. “I still think you’ve got, embedded in their statistics and operating performance, a degree of impairment they’re coming through, so I think with the large companies you’re not going to see, with a couple of exceptions, you’re not going to see large impairment charges, they’ve already cleaned house.” The ‘house cleaning’ across the board began with a slew of CEO firings over the last 12 months and has now turned to cost discipline, which gold producing companies are putting into action. Where they’ve been cutting costs will be a focus in the third-quarter results, said Rohit Savant, senior commodity analyst at CPM Group. “You’ve already seen mining companies scale back on all sorts of capital expenditure, cut corporate staff, and what that did was reduce the all-in sustaining costs for these mining companies, but it did little to reduce cash costs,” Savant said. Cash costs, according to Savant, increase by two factors; one is the input costs and the other is the grades of ore mined. “The long-term cuts will come from input costs as demand for these inputs decreases when mining companies are scaling back on new projects and expansion projects - that’ll automatically deflate these input costs, and therefore cash costs,” he said. “A quicker way for them to reduce costs would be to shift to high-grade ore. Once they shift to higher grade ore, it will automatically shift cash costs down.” Gray believes that high-grading assets would work, but that would be putting a band-aid on the issue. “High-grading would be more a survival instinct for smaller for single asset producers,” Gray said. “In 2014, I see a lot more M&A activity at the bottom end of the market, the smaller producers; the junior mining companies, they’re not capable of surviving in a pure survival approach, they have to look at alternative paths forward.” Given the downturn in the industry, eyebrows have been raised as to the lack of M&A activity. With several junior companies struggling to stay afloat, it seems to be a buyer’s market with no buyers. “M&A typically happens at the top of the market - not at the bottom - when share prices are high and investor and company expectations of rising gold prices makes for a buoyant and optimistic mood, and a willingness by all parties to assume risk in order to achieve expected spectacular returns,” said Dan Hrushewsky, senior gold analyst, with a focus on African companies, at Jennings Capital Inc. “The exact opposite happens in a down market, where low share prices and gold prices create a very pessimistic and risk averse environment. “This despite the fact that good assets can be acquired for bargain prices at the bottom of the market,” he added. “M&A will come back when the gold price and equity valuations improve.” Gray mirrored the sentiment, pointing towards major gold producers typically not acquiring assets when the markets are at a low. “I don’t see the majors as acquirers and that’s the interesting paradigm, and it’s been a fairly consistent paradigm through the cycles,” Gray said. “Majors, and this is a very general statement, they typically don’t acquire projects or companies at low points in the cycle for the very reason that they’re accountable to their shareholders. “They’ve done a poor job of articulating their strategy,” Gray added. “What the market wants to see, what investors want to see, is consistency, structure, strategy and accountability from major gold producers.” Some North American major gold producers have announced their third-quarter earnings release dates.
Posted on: Tue, 15 Oct 2013 06:56:06 +0000