Falling Gold Prices

Barrick Gold Corporation (USA) (ABX), Freeport-McMoRan Copper & Gold Inc. (FCX): Falling Gold Prices are Starting to Hurt Miners

Page 1 of 2

As I write this post gold is trading at $1,370 per troy ounce.  In the past two months, the price of gold has varied between $1,347.9 and $1,415.1, depending on when this is published.

Ironically, gold, often considered one of the safest assets around, has been the most volatile asset in terms of price for the first half of this year. Of course, this volatility has caused chaos in the mining world if prices drop much further even more pain and confusion could be ahead.

Since 2010, the cost of mining a single ounce of gold has risen as much as 40%, which was acceptable when the price of gold was rising as well. Now that the price of gold is falling, miners are starting to reconsider expensive high-cost projects.

Barrick Gold Corporation (USA) (NYSE:ABX)

According to Toronto-based analysts at Dundee Capital Markets, the average all-in cost of the twenty largest gold miners in the world was $1,306 per ounce in Q4 2012. In addition, according to Joseph Wickwire, manager of Fidelity Investments’ Select Gold Portfolio fund, about 30%-40% of gold mine production is not cash-flow positive under $1300 per ounce.

Elsewhere, the top five largest miners predict that their all-in cost for 2013 will average between $1,200 and $1,000 per ounce.

The difference between all-in cost and cash cost

When I say all-in cost I mean the costs of direct mining, like getting ore out of the ground, refining and the company’s additional costs like administration, sales, interest cost and taxes. Historically, miners would use the cash cost of production, which is usually much lower and only covers the cost of getting the stuff out of the ground. All-in costs are a much better metric for investors to use to establish how efficient and profitable a company actually is.

On an individual level, how are falling commodity prices affecting companies?

Barrick Gold Corporation (USA) (NYSE:ABX), usually considered the world’s largest gold miner, anticipates 2013 gold production to be in the range of 7.0-7.4 million ounces at an all-in cost of $950-$1,050 per ounce and total cash costs of $610-$660 per ounce.

In addition, the company expects copper production to be about 480-540 million pounds at a cash cost of $2.10-$2.30 per pound and an all in cost of $2.60-$2.85 per pound.

Metal Projected all-in cost (average) Spot price (approx.) End of year future price Margin based on end of year future
Gold $1,000 $1,380 $1,390 39%
Copper $2.73 $3.17 $3.20 17.2%

Meanwhile, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) reported within its 1st quarter 2013 earnings conference call that the flowing price changes would have an effect on the company’s full year EBITDA:

Change Effect on EBITDA ($US Millions)
Copper: +/- $0.10/lb. $405
Gold: -/+ $50/ounce $75
Diesel: -/+ 10% $100
USD change: +/- 10% $175

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) realized prices of $1,606 per ounce for gold during Q1 2013 and $3.51 per pound for copper during the same period. So far this quarter, the price of gold has averaged $1,415 per ounce, indicating a $286.5 million decline in EBITDA for the company during this quarter from gold production. Furthermore, as I write, copper is currently trading at a price of $3.19 per pound, indicating a $1,296 million fall in EBITDA for the company during this quarter from copper production.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

The 10 Longest Wars of All Time

The 13 Worst Looking Foods that Taste Great

The 6 Most Gruesome Injuries Suffered During a Sports Match

The 20 Biggest Contracts in MLB History

The 7 Worst Blown Calls in Sports History

7 Free Ways to Advertise Your Business Online

The 18 Best R&B Songs of the 90’s

The 10 Most Dangerous States to be a Cop

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!