Top 10 gold miners face 2013 earnings nightmare

The tribulations of the world’s No. 1 gold miner, Barrick, are a sign of huge difficulties ahead for the other gold majors too.

Barrick Gold’s latest announcement of yet a further delay in the hugely costly Pascua Lama gold mine, high in the Andes makes one wonder if the company will ever bring it on stream – however the huge amount of money spent so far suggests the world’s No.1 gold miner has gone too far to can the project now and maintain any kind of shareholder confidence.

See also: Barrick’s huge Pascua-Lama gold mine start-up now delayed to mid-2016

Even so, the project could yet be delayed beyond its new projected start-up date of mid-2016 given continuing local hostility on both sides of the Chile and Argentina borders and one has to anticipate that overall capital costs to bring the mine into production may end up to be yet substantially higher – perhaps in excess of $10 billion when the money is finally counted.

Nowadays Barrick says costs have escalated from around $2 billion, when the initial development plans were set, to the current $8 billion plus and a revised capital cost update has been promised for Q3 this year when the re-sequenced construction schedule has been finalised.  However deferring some expenditures by two years at present (and on past performance it may be longer before the mine starts producing gold) will not reduce the overall capital spend, but is likely to increase it, even if only by inflation, over the period.

But where does this leave Barrick’s other major projects.  Reko Diq has effectively been taken from it already due to adverse court decisions in Pakistan, but one suspects that will be something of a relief to relatively new CEO Jamie Sokalsky given the deposit’s location in an area of some fundamental Islamist hostility to the West and close to the Iran and Afghanistan borders.  That could have been a hard one to sell to prospective financiers whatever the feasibility studies might have suggested with regard to profitability.

Back in the Andes, Cerro Casale has already been put on the back burner.  This again would have been a high altitude ultra low grade gold/copper project which was last estimated to cost around $5 billion to develop.  However Barrick does have good expertise at developing and operating projects at this kind of altitude with its big Veladero mine over the border in Argentina and presumably it will be examining ways to see if this project can be resurrected, perhaps at a lower capital cost, otherwise we don’t see it resurfacing until late in the decade at the earliest, and even then it would probably need a major gold price boost to see it back on the development schedule.

Indeed Barrick now has little new in the gold mining development pipeline apart from its Goldrush project in Nevada, USA – the part of the world which set the company on track to become the world’s largest gold producer.  Goldrush is only due for a go-ahead decision perhaps in 2015 – a prefeasibility study is due for completion by the end of next year. 

Pueblo Viejo in the Dominican Republic, in jv with Goldcorp, has just come on stream which will give Barrick some leeway in maintaining its overall gold output, but with some of its operations in the U.S. and Australia beginning to fade a little, the company’s overall gold production could start to fall next year and the year after.  Indeed this year’s gold production guidance of between 7 and 7.4 million ounces suggests the decline may already be beginning in 2013 in comparison with 2013’s of 7.42 million ounces.

Even so, Barrick is unlikely to be overtaken as the world’s largest gold producer in the near future.  Many of the problems it has been facing are also being faced by other top gold miners.  Newmont, for example, is having a torrid time getting its $5 billion Conga gold project off the ground in Peru.  Even at the top end of its 2013 guidance of 4.8 to 5.1 million ounces it remains well below Barrick’s likely total. Kinross has been running into technical difficulties at its Tasiast operation which has seen big writedowns here, while Freeport McMoran (which currently falls just outside the world’s top 10 gold miners noted below despite primarily being a copper miner) has been having some serious problems at its Grasberg mine in Indonesia, which has been at times the world’s single largest gold mine in terms of output.

What also needs to be taken into account is that all-in sustaining costs, or their equivalents – now being reported by many of the majors – are, even in the best cases, running only a little below the current gold price – indeed some miners, and certainly some individual mines, will be heavily in the red at the current gold price and decisions may well be taken to cut operations back, or close them altogether unless there is a major price pick up.  To emphasise this point, Goldcorp, which prides itself as being among the lowest cost gold producers, reports its all-in sustaining costs at $1,000-$1,100 an ounce, which suggests many of the others will have operations that will be well be under water at a gold price of between $1,200-$1,300.  Indeed Gold Fields CEO, Nick Holland, has gone on record as saying that gold miners need $1,500 an ounce gold to stay in business!

Table.  Top 10 gold miners – 2012 production and 2013 guidance

Rank Company 2012 production (Moz) 2013 guidance (Moz)
1 Barrick 7.42 7.0-7.4
2 Newmont 5 4.8-5.1
3 AngloGold Ashanti 3.9 4.1-4.4
4 Goldcorp 2.4 2.55-2.8
5 Kinross * 2.6 2.4-2.6
6 Newcrest 2.29 2.0-2.15
7 Gold Fields ** 2.03 1.8-1.9
8 Polyus Gold 1.68 1.59-1.68
9 Yamana * 1.2 1.44-1.6
10 Agnico Eagle 1.04 0.97-1.01
  Totals 29.56 28.65-30.64

*    Reporting gold equivalent production

**  Gold Fields split off most of its South African mines into Sibanye Gold in February this year and the figures in the table do not include production from the Sibanye mines.

Notes:  Companies ranked by 2013 guidance rather than by 2012 gold output. Figures collated by Lawrence Williams from company announcements.

As can be seen from the above table of the world’s top gold miners, 2013 gold production guidance in total is, at best, flat, and with the gold price problems facing the miners some of the anticipated 2013 figures could well be seen as optimistic.  And again, if prices don’t pick up substantially future production expectations from the major miners will turn down sharply until supply constraints force a major price rerating.

Goldcorp appears to be the only one of the mega gold miners so far to have avoided any massive writedowns.  In general its policy has been to only operate at the lowest cost end of the spectrum and its capital spending over the past couple of years has perhaps been more constrained than that of its peers. Even so, as noted above even it is operating close to the margins at current prices.

Newcrest in Australia has only just announced it is taking some major capital writedowns this year – and Kinross has already done so.  Barrick now comments that it anticipates taking some $5 billion in further impairments this year due to the Pascua Lama delays.  This is probably not the end of the major write-downs and we can expect to see more being taken by some of the world’s top miners before the year is out.

Thus, accounting-wise at least, it’s going to be a nightmare year for most of the world’s top gold miners as huge writedowns drive profit figures into the red – and if the big boys, with their underlying financial strength are suffering so badly imagine what it is going to be like for the mid tier and junior gold producers! A potential financial bloodbath?  New mines will be put on hold, old mines closed, some permanently, exploration will dwindle.  Global gold production will fall, shortages will develop and then prices will be ultimately forced up dramatically and only then will production start to pick up again driven by the higher prices.  Such is the cyclical nature of the global mining sector and gold will not be immune.

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