Message To all Gold Mining CEOs – A Gold Mining Predicament

The main GDX gold mining index is down 37.4% YTD and down 54.4% since the 2011 peak. It is a very sorry state of affairs.


The gold price is now down 17% YTD and clearly questions are being asked about the viability of the gold bull market.  Even more worrying should be the FY 2012 financial numbers for the big miners.  Using the Bloomberg function FA, you can get a quick look at the financial numbers in a basic form.


Barrick Gold      FY 2012  millions


Gross Profit


Cash from Operations


Capital Expenditures


Free Cash Flow





The Free Cash Flow numbers for 2012 for the other top producers were:




Agnico Eagle……250.45



The average gold price for the sales of produced gold in 2012 was approximately $1650 per oz.  You don’t have to be a rocket scientist to understand that if the gold price is at $1400, as it is currently, then each of these miners are going to be producing at a loss.  Last year we wrote a blog, Gold and Silver Mining: A Post Mortem, which highlighted the increasing costs which were crushing margins.


Well, those margins are negative now and, even if gold stays at the current price, the margins are likely going to get more negative. Some inputs like oil have fallen as well which will help, but most are increasing as inflation pressures remain.  These companies are mining finite assets – they are not cyclical firms managing their business at the bad point in the business cycle looking to survive until the economy brightens.  Mining all your reserves at a loss is clearly a rather fatalistic and bad business plan.


We have seen hundreds of mining executives over the years.  They are a fantastic group of people working in often atrocious, dangerous conditions. Despite the numerous ‘unforeseen’ disasters in the whole mining process from discovery to production, they remain incredibly optimistic about their own project.  No one expects their project to be delayed or nationalised. No one expects to pay $8 billion for an asset 3 years ago and write down $6 billion already.  Most have not appreciated how much bull markets make geniuses out of idiots – not that they are idiots – but that they might be well served to be more pessimistic. To expect massive overruns on budgets and permitting times. To expect huge problems with First Nations minority groups or complex metallurgical problems. This is the norm in the mining business and not freak one-off problems.


In the late 1990s, when the nominal gold price was much lower, costs were much lower as well, and arguably margins were slim-to-negative then too. The decision taken at that time was to hedge forward production to lock in a profitable margin, no matter how wafer-thin that was.  They were helped by the high interest rates of the day. With Fed Funds at 6-7%, the forward contango price curve of gold prices was severely steeper than today. Today, the 3 year gold forward price is only 2% or $25 per oz higher than spot.  If hedging was an incredibly bad move 10-13 years ago with a steep contango, then it is a dead cert way to the poor house today, locking in a 100% guaranteed loss. Of course your bankers might insist on it for new finance etc, but doesn’t mean it’s smart.


Is there a Plan B? Mining company CEOs need to face up to reality.


Costs are greater than revenue at $1400 per oz gold. No matter how much we might delude ourselves that cash costs are $800 per oz and  all-in costs are $1200 per oz: they are not. If they were we would see free cash flow.


Do not even think about hedging the gold price at these current levels. It is locking in a loss, one that will probably grow over time;  it is akin to slavery.


As ridiculous it might sound , I believe that the only solution, apart from praying that the gold price goes immediately to $2000 per oz is to wind down production.  Others might suggest warehousing gold to restrict supply coming on to the market. Whether intentionally or not, production will start to drop as smaller mining companies will fold. There are allegedly 1000 mining companies on the TSX index with less than $200k in the treasury.  The most power that the big mining companies have in order to try and survive this debacle is to reduce production in any feasible way and stop supplying the physical market.  This should not only be done but should be shouted from the roof tops.   We need to hear words to the effect of: “We cannot produce gold profitably at these levels so we are stopping and saving our prize reserves for another cycle”.


It may not work in stopping this current rigged market rout but it has to be a better idea than hedging your way to self-inflicted penury.  The at  least the mining industry could hold its head up high and be in the driving seat, rather than getting mugged off by the market manipulators.




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