Third is usually weak for gold prices.It may recover some in August, then slump to to about $300. till mid-December, is my guess ??
Tuesday, August 5, 1997
Gold slump puts miners in red
By DAVID THOMAS
The Financial Post
ÿA sustained slump in gold prices is battering the profit outlook for Canada's major gold producers.
ÿ"With the gold price below US$350 an ounce, many gold companies will lose money," John Ing, analyst with Maison Placements Canada Inc., cautioned in a recent report on the sector.
ÿOther than a short-lived rally in late February that lifted it from US$340 to US$360 an ounce, the price of gold has been on a slide since early 1996 when it hit US$415.
ÿYesterday, the spot price of gold in New York closed at US$323.90, down US80›. In early July it slid to US$318, reaching a low not seen for 12 years.
ÿThe slump has taken its toll on the stocks that make up the Toronto Stock Exchange's gold and precious metals index. The index peaked at 13199.71 in June 1996 and tumbled to a 52-week low of 7529.89 last month. It closed Friday at 8276.43.
ÿGold's shift from gloomy to downright bleak in 1997 will take its toll on company earnings reports.
ÿTwo weeks ago, Vancouver mining giant Placer Dome Inc. said lower operating costs enabled it to more than double its second-quarter profit to US$19 million (US6› a share).
ÿHowever, mining analysts expect depressed gold prices will make it tougher for Canada's second-largest gold producer to keep up that kind of performance.
ÿIn the past five months, analysts have slashed their 1997 annual earnings projections for Placer by much as 75%. A survey of 1997 earnings estimates shows they now forecast per-share earnings for Placer of US12› to US15›. In March, their consensus was US60›.
ÿIt's a similar story at Toronto-based producers TVX Gold Inc. and Kinross Gold Corp.
ÿIn May, the consensus called for TVX to earn more than US20› a share this year. Today, it's US3›.
ÿKinross's forecast earnings have fallen from more than 30› a share to between 11› and 13›.
ÿFor Kinross, those estimates will likely be revised downward after its decision last week to take a US$24-million writedown. That pushed the firm from a small profit into a US$23.5-million loss for the second quarter.
ÿMost gold producers have forward contracts that lock in, or hedge, current sales at past prices. But as the hedge contracts come due, companies become exposed to the full brunt of today's anemic gold market.
ÿThe impact is less significant for a producer like Barrick Gold Corp., which aggressively hedges all its production. Canada's largest gold producer has sold forward three full years of production at US$420 an ounce.
ÿWhen gold tumbled below the psychologically important barrier of US$350 an ounce in late January, many analysts thought they were seeing the price hit bottom.
ÿBut short selling by traders and sales by central banks in Australia and several European countries have combined to keep the price low.
ÿIng, who has a reputation on Bay Street as a gold bull, is now predicting bullion could sag below US$300 before it recovers.
ÿ"We expect a long, dry summer and gold prices may retest their lows with a downside risk to US$297 an ounce." On the bright side, he adds, "a bottom is in sight."
ÿAs he was at the beginning of 1996, Ing is still calling for gold to rally back to the US$500 level, but he has stretched the time frame to 1998.
ÿIn the meantime, the winners will be companies that can produce gold at a cost of less than US$250 an ounce. Ing singles out Agnico-Eagle Mines Ltd. (at US$185 an ounce), Prime Resources Ltd. (US$175) Barrick (US$200), Placer (US$210) and Cambior Inc. (US$250) as companies that can weather the storm.
ÿCompanies that stand to take a beating if current prices endure include Pegasus Gold Inc. (US$260), Echo Bay Mines Ltd. (US$275) and Royal Oak Mines Inc. (US$325).
ÿAlready feeling the pain, money-losing Echo Bay announced recently it plans to lay off a third of its office staff and conduct a major review of its operations.
ÿThe company lost US$20.7 million (US17›) in the second quarter and hasn't reported a profit since the third quarter of 1994.
ÿ
--------------------------------------------------------------------------------
|
