Barrick Gold Corporation (USA) (ABX), Goldcorp Inc. (USA) (GG), Newmont Mining Corp (NEM): There Is a Bigger Problem Overshadowing Gold Miners

Page 1 of 2

Rising capital expenditures, write-downs, and falling profits are all factors that are now affecting gold miners, pushing stock prices and valuations to lows not seen since, well in some cases, ever.

However, despite these well publicized factors, one of the bigger issues affecting the companies is the creeping price of gold production, which has been rising much faster than inflation and the price of gold over the past three years.

Indeed, the all-in sustaining cash cost of producing one troy ounce of gold for Barrick Gold Corporation (USA) (NYSE:ABX)Goldcorp Inc. (USA) (NYSE:GG), and Newmont Mining Corp (NYSE:NEM) has expanded at a compounded annual rate of 19.3%, 5.7% and 21.3% respectively over the past four years (that is including the estimated all-in sustaining cash production cost for this year).

All-in sustaining cash costs

 Year ABX GG NEM Real Price of Gold
2010 $649 $932 $617 $1420
2011 $752 $704 $752 $1531
2012 $945 $874 $854 $1664
2013E $1100 $1100 $1100 $1290
CAGR 19.3% 5.7% 21.3% -3.2%
Ex 2013 5.40%

As shown in the table, at a compounded annual rate, the price of gold has fallen 3.2% a year for the last four years, including performance so far this year. However, excluding performance so far this year, the price of gold is up 5.4% on a compounded annual basis.

In comparison, the price of gold production has grown at a much faster rate, rising rapidly at all three producers in the four year period.

Unfortunately, this cost inflation is not set to slow down anytime soon.

Cost breakdown

Obviously, the majority of gold’s production cost comes from the cost of employment, which is shown on the right side of the chart.

Wages for workers are placed into three sections, exploration, mineral extraction and pre-strip. All three of these costs are set to rise over the short, medium and long term as gold becomes harder to find and extract. Longer mining times will lead to more expenditure on mining equipment and wages. Additionally, exploration, which is being driven to even more extreme environments, will require more compensation for the risks workers take on.

69% of the price of producing an ounce of gold is related to labor, and these costs are set to continue rising indefinitely, at least in line with inflation if not more.

So, what are these companies doing to offset costs?

As the world’s largest gold producer by output, Barrick Gold Corporation (USA) (NYSE:ABX) is leading by example. The company has shelved or cut $4 billion of previously allocated capital expenditures over a four year period. In addition, the company has plans to suspend, close or divest high-cost production mines in an attempt to improve cash flow. So far this year, Barrick has reduced capital costs by $2 billion, offsetting the majority of declines in metals prices. Barrick Gold Corporation (USA) (NYSE:ABX) has also slashed its corporate staff headcount by 30%.

Newmont Mining Corp (NYSE:NEM) has been forced to cut costs after the company was thrown into a second quarter loss, taking a multi-billion dollar writedown on the value of its mines. The company retaliated by slashing its most expensive part of production, the work force. Newmont Mining Corp (NYSE:NEM) has been rapidly cutting jobs related to its Australian operations, historically a region where wages are rising rapidly. The company has cut nearly 100 jobs in Australia so far this year and is firing a third of its workforce in Colorado. Moreover, the company has cut its year-on-year capex spending by 29%.

Goldcorp Inc. (USA) (NYSE:GG) has implemented a companywide spending review and intends to cut 7% of its $2.8 billion capital expenditure budget for 2013. The company is also cutting 10% of its admin expenses, and exploration spending is taking a haircut of 11%. Bear in mind that Goldcorp Inc. (USA) (NYSE:GG)’s management stated earlier this year, “we’re not going to take knee-jerk reactions to a short term price move,” indicating that the company has become more cautious about the industry’s outlook.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 44 percentage points in 21 months Learn how!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

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!