Junior gold crash: cash costs come calling

Quick analysis appears to show recent cash costs to be correlated with depth of shareprice decline for 10 junior gold producers.

Here’s a quick and dirty look at the shareprice fall of 10 junior gold producers from market close Thursday last week to market close Wednesday this week (chart below).

It’s not meant to be a comprehensive overview. Rather consider it a snapshot of the impact – swift and brutal – from the equally swift, if not quite as brutal in proportionate terms, drop in the price of gold over the same period. The shareprices of these 10 junior gold producers fell, on average, 25 percent while gold declined by about half that much, or roughly $200 to just under $1,400 an ounce.

10 Junior Gold Producers, Shareprice + Cash Cost 2012

Junior Gold Sharefall (11/4 to 17/4 close) Reported Cash Cost 2012 ($/oz) Gold Fiscal 2012 (oz) April 11 Close April 17 Close
Kirkland Lake 35% $804 100,275 $4.14 $2.68
Osisko 32% $909 388,478 $5.11 $3.49
Lake Shore 30% $990    85,782 $0.64 $0.45
B2Gold 27% $766 157,885 $2.91 $2.13
Perseus Mining 25% $802 137,297 $1.86 $1.40
Timmins Gold 22% $743    94,444 $2.91 $2.27
Crocodile Gold 22% $1,166 153,227 $0.23 $0.18
Rio Alto 22% $532 201,113 $4.33 $3.39
Brigus Gold 21% $762    77,374 $0.70 $0.55
Alamos Gold 14% $438 200,000 $12.25 $10.48

Data: Company websites, TMX Group

If a slight pattern emerges in looking at the 10 junior gold producers it’s that those with higher cash costs – as determined by their reported cash cost in fiscal 2012 – generally fell the most over the April 11-17 period. While no one would call this a statistically robust sample and every gold company has its idiosyncrasies that cannot be reflected in a simplified chart – e.g., debt, future production expectations and shareholder base – the apparent correlation to high shareprice pain and cash cost should come as no surprise.

The subject – producers and their cash costs – has received intense scrutiny by analysts and commentators in recent days. The thinking is: if the rout in the price of gold worsens or the price of gold crawls along at about the same level as now for months to come, then those with higher cash costs could take harsh cuts to profits or, worse, incur losses. Losses will be most difficult to weather for those with mountains of debt to pay off, like juniors that only recently joined the ranks of gold producers and funded their gold mine constructions primarily through debt.

See: “What will a collapsing gold price do to gold production?”

Indeed some junior management sought to allay concerns of the jittery gold-stock investor this week already. Yesterday Osisko Mining, which continues to ramp-up production at its Canadian Malartic gold mine in Quebec, issued a press release about the fall in its shareprice – down 32 percent since market close Thursday to Wednesday. Osisko said it “wishes to advise that it is not aware of any undisclosed material adverse information which would explain the recent decline in its share price.”

Of course any number of junior gold miners gold might have issued the same press release given similar shareprice drops.

But in Osisko’s case there was probably some added impetus to comment given analyst notes from earlier in the week. The Financial Post reported on projections from TD Securities that detailed trouble for gold producers, Osisko included, if the price of gold dropped to $1,200 to $1,300 (which would have been seen as crazy talk a week ago, put perhaps not anymore with confidence shaken in gold since last Friday).

Reported the Financial Post:

“The two companies that took the biggest hits to their stock prices on Monday were the emerging producers Detour Gold Corp. and Osisko Mining Corp. The TD analysts figure that Detour could finish the year with a deficit of US$9-million at a US$1,200 gold price (though the company can draw down from a credit facility). And Osisko would have significant trouble at lower prices as well.

‘We calculate that Osisko has minimal financial flexibility to weather lower gold prices, with a US$1,300 [per ounce] gold price leaving the company with less than US$10-million in its treasury at year-end,’ (TD Securities) wrote. The situation would be even more challenging in 2014, they added, as Osisko has US$220-million of scheduled debt repayments.’”

Thus, it would seem, Osisko emphasized its projected cash costs this year (under $900), its cash position ($139 million) and its debt ($326 million) in response to such analyst speculation.

Indeed, if the price of gold does not quickly recover, or if it falls further, Osisko may not find itself alone in detailing its financial situation and options to control costs to markets. Canaccord, commenting on Osisko in its Morning Coffee publication, noted “Announcements like this will be more common place over the next several days.” 

In particular you can bet those junior gold miners with higher operating costs and debt on the balance sheet are starting to do some soul searching; to scour the books, to rejig mine plans (i.e. high  grade now!) and to talk to their bankers.

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