Here's a one sided article if I ever saw one, but she does make some valid points.
Producers like PDG and ABX are claiming $50. cash cost Gold, but when the cost of building the mines are factored in, the total is more like $300./ounce.
What a load of B-S.
These mines should never be built in this environment, and yet these idiots go on blindly cutting their (and our) throats......
January 11, 1999
Golden Glut - Low prices fail to curb supply
By Cheryl Strauss Einhorn
Since 1996, gold prices have fallen 30%. Yet, gold producers have been in denial. Unlike other commodity producers, gold mines have failed to curb production. Despite the low prices, supplies of gold are actually rising, making the miners their own worst enemies.
New mines came on stream last year in North America, Australia and elsewhere. And in 1999, production is forecast to increase yet again -- by 2%, to 66.3 million ounces.
Technology, meanwhile, has dramatically lowered the cost of producing gold. At Placer Dome's Pipeline deposit, it costs just $50 to extract an ounce. And while such a low cash cost might make it seem like Placer should be quite profitable, sunk costs -- those expenses to develop the mine itself -- still place total costs at $250 an ounce. "With spot gold trading for $290, the fundamental margin is insufficient to pay for general overhead," says Placer chief executive John Willson. That's why "gold mining is a low-margin business and, as a result, mining companies have unfortunately had a history of poor returns," he admits.
But the lower the costs, the further gold prices have to fall, since prices tend to revert back toward those costs.
Moreover, "every time the market rallies, producers sell forward," says Morgan Stanley's Doug Cohen.
Hedging has increased as an acceptable practice among producers. And while some staunchly defend it, saying that "we can better plan our business on a longerterm basis," as Barrick Gold's CEO Paul Melnuk puts it, even he admits, "most hedging isn't sustainable."
Hedging temporarily supports earnings. But it is unclear to what extent an investor should reward a company for doing so, given that hedging gains are generally one-time events. The gold in the ground is not worth the price of the hedge per se; it's worth whatever the prevailing gold price commands.
Indeed, investors typically buy mining shares not because a mine has locked in a future price, but rather precisely the opposite. They want the leveraged play on the underlying commodity's future potential gains afforded by the stocks.
Moreover, as prices stay low, it increasingly becomes difficult for companies to lock in attractive forward prices and "hedging volumes will have to fall," says CPM Group's Jeff Christian.
This tough reality will at some point force gold companies to value their reserves at market prices-- and when they do, watch out. Thus far, most
companies have resisted marking their reserves to market. In 1998, many gold companies used $350 an ounce to value their gold reserves. But the last time the market saw that price was briefly in 1997.
Further, many producers are undercutting themselves by "high-grading" their ore. That means they are skimming some of the best gold off
the top and leaving the rest of the mine untapped. In this way, companies may process fewer tons of gold, but the ore value per ton rises and they may optimize their cash flow, says Todd Hinrichs at ABM Amro.
Yet high-grading is a Band-Aid solution to the low gold-price problem. Mines are valued based upon proven reserves. If a company uses only a small part of those reserves, it effectively has wasted the money it sank to develop the rest of the mine that lies untouched.
All told, many companies are operating at a loss and "they might continue to do so for several more years," says Christian.
What allows the gold producers to do so despite such low gold prices? The fact that they are public and that gold bugs still exist to hold their shares.
With apologies to Grandpa Ben, many gold bugs are senior citizens. They remember a gold-backed U.S. dollar and believe gold is a store of value
beyond its commodity status. But this group is getting smaller every day.
Of course, there are also gold mutual funds that must own gold shares. But alas, these funds have done poorly. Not only were they among the worst-performing stock funds for 1998's fourth quarter, but many rank among the worst five-year performing stock funds as well.
Ultimately, uneconomic gold companies will be able to operate only as long as their inflated share prices allow them access to capital. They can raise cash by issuing more stock or debt. But at some point, the gold companies will have to shutter production aggressively as some oil companies are doing now.
After all, 19 years of generally weak performance have pushed gold off the radar screen for many investors, but it has not yet pushed the gold
companies to bring their market into better balance between supply and demand. |
