Compania de Minas Buenaventura SA (ADR) (BVN), Newmont Mining Corp (NEM), AngloGold Ashanti Limited (ADR) (AU): Added Pressure on These 3 Precious Metal Producers

Volatile precious metal prices, environmental concerns, and project-specific concerns are the biggest risks facing gold and silver miners. However, some companies face added pressure deriving from declining production and high inflation costs.

Compania de Minas Buenaventura SA (ADR) (NYSE:BVN)Internal problems may affect Buenaventura growth

In Peru, Compania de Minas Buenaventura SA (ADR) (NYSE:BVN) is a leading  precious metals producer. All of its operating assets are located in Peru. It operates seven wholly owned mines and holds minority interests in several important mines, including a 19.3% in the Cerro Verde copper mine, which helps diversify Compania de Minas Buenaventura SA (ADR) (NYSE:BVN) away from precious metals, and a 43.7% in the Yanacocha gold mine, one of the leading gold producers in Latin America.

The company reported weak first-quarter results due to lower metal production as well as an increase in operating costs. Net income plunged 51% year-over-year to $102.7 million. Gold production fell 12% to 243,811 ounces, as production in Yanacocha fell 22%. Silver output gained 12% to 4.72 million ounces, while zinc and lead rose 24% and 44%, respectively.

Compania de Minas Buenaventura SA (ADR) (NYSE:BVN)’s main problem is cost controls. Its Earnings Before Interest, Taxes and Depreciation (EBITDA) margin dropped 19 percentage points year-over-year. In Orcopampa, the company’s primary gold producing property, lower gold production and greater exploration efforts drove up cash operating costs per ounce by 38%.

The Conga project is intended to help replenish Yanacocha’s declining reserves and production, but it is experiencing delays due to local and environmental opposition.

Higher costs and lower prices

Newmont Mining Corp (NYSE:NEM), which has partnered with Compania de Minas Buenaventura SA (ADR) (NYSE:BVN), is engaged in the production of gold and the acquisition and development of gold properties worldwide.

Newmont Mining Corp (NYSE:NEM) also missed forecasts by posting a first-quarter adjusted net income drop of 39% year-over-year to $354 million,  led by higher costs and lower commodity prices.

Gold production decreased 11% year-over-year to 1.165 million ounces, while copper production was up 9% to 38 million pounds. Also, mining costs are increasing due to declining grades, increased royalties, plus higher labor and fuel costs, among other reasons. This quarter gold costs applicable to sales were up 22%, while copper costs were up 11%.

The development-stage Long Canyon project in Nevada could help leverage Newmont Mining Corp (NYSE:NEM)’s infrastructure. Also, the Batu Hijau copper and gold mine in Indonesia, currently in a stripping phase, can improve production and costs after 2014, when

Restructuring is necessary

Now, let’s take a look at the third-largest gold producer in the world, AngloGold Ashanti Limited (ADR) (NYSE:AU). The firm produces most of its gold in South Africa and continental Africa, which tend to have higher-cost gold. This is why AngloGold Ashanti Limited (ADR) (NYSE:AU)’s earnings and cash flows are especially vulnerable to corrections in gold prices.

AngloGold Ashanti Limited (ADR) (NYSE:AU) gold production decreased 8.4% year-over-year to 899,000 ounces, while unit cash costs increased 17%. AngloGold Ashanti Limited (ADR) (NYSE:AU) expects modest production increases over the course of 2013 stemming from both current and new operations.

Sequentially production rose 4.7% and costs fell 7.5%, respectively, as strike activity at the firm’s South African operations ceased and cost cuts came in near AngloGold Ashanti Limited (ADR) (NYSE:AU)’s expectations. AngloGold Ashanti Limited (ADR) (NYSE:AU) reduced costs by 24% to $65 million, and expects an additional $50 million in savings over the course of 2013.

However, Goldman Sachs recently stated that AngloGold is likely to require restructuring of some sort in 2013 and 2014 as it believes any attempts to reduce costs by reducing labor and closing mines could be met with industrial action or government interference.

The firm has made progress on several projects. The Kibali and CC&V projects have shown positive signs and the Tropicana Gold Project in Australia is expected to come online by the end of 2013.

Bottom line

An inability to enhance profitability when gold prices are still high by historical standards is a poor sign for investors. All all three cases discussed here, lower production may be reversed and costs may be pushed down, but profitability will be difficult to enhance without a substantial increase in gold prices.

Newmont Mining Corp (NYSE:NEM) and Compania de Minas Buenaventura SA (ADR) (NYSE:BVN) are working on several major expansion projects that are scheduled to come online during the next few years, but execution risk is another important factor for investors to consider. Also, geopolitical risk is high in Compania de Minas Buenaventura SA (ADR) (NYSE:BVN)‘s case, as operating income is generated from exposure to a single country, Peru.

One should monitor AngloGold’s cost-cutting efforts carefully as it may a have a boomerang effect. Its non-African gold mines in the US, Brazil, Argentina, and Australia are promising, as they tend to feature lower production costs and diminished political risk. However, lower gold prices may spoil AngloGold’s strategy, as its cash flows are very vulnerable to even a modest correction in prices.

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Damian Illia has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Damian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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