High-cost producers feel the pinch
Numerous mines in Australia and New Zealand are unprofitable at the sorts of gold prices seen over the past few days, and in a commodity where single-mine companies are common, that means quite a few are facing an uncertain future.
That might be hard to believe, given that Monday's low of $US1425 per ounce would be considered an excellent price for gold over most of the past 20 years.
But goldminers are also facing labour costs near record highs, and a local currency that refuses to fall in line with the commodity price.
"There are definitely a few gold producers out there who wouldn't be making money at these prices," said Mike Millikan, a gold analyst for Hartleys in Perth.
A recent Bell Potter survey of 15 mid-tier Australian producers showed that total production costs averaged $1170 per ounce.
Bell Potter analyst Mark Paterson said five of those 15 would be marginal at the current price.
Those with costs at the higher end include Ramelius Resources, Reed Resources, Norton Gold Fields, Focus Minerals and Saracen Mineral Holdings.
Two junior gold miners have gone into administration in recent weeks - Navigator Resources and Kentor Gold - and PPB Advisory's corporate restructuring specialist Campbell Jaski said he was seeing an increasing number of gold producers seeking help to stay afloat.
Mr Jaski said a failure to manage risk through hedging the gold price was a common feature among the companies in distress.
"Over the last five years we have seen the majority of gold producers (remove) their hedge book, so there has been a reluctance to hedge," he said.
But it's worth remembering that sometimes there are important details to explain what looks like a devil.
Take Saracen for example, a small WA gold miner whose costs have been pushing $1600 per ounce. The company has been spending up on expansion of its Whirling Dervish mine, which will lead to higher production next year.
"Once those key expansion projects are done ... we are at a stage then that capital spend drops right off and our margins increase," said Saracen boss Raleigh Finlayson.
Furthermore, Saracen was one of the few gold juniors to take out a hedge under the terms of a debt package with Macquarie. That hedge will see Saracen sell about 188,000 ounces of gold at an average of $1698 per ounce over the next couple of years.
Sound sensible? Not sensible enough to prevent Saracen losing close to 18 per cent of its market capitalisation on Monday.
Frequently Asked Questions about this Article…
Even though US$1,425/oz is historically a strong gold price, many Australian mines face high local costs that eat into profits. The article notes labour costs near record highs and a local currency that hasn’t weakened in line with the commodity. Those factors push up production costs so some mines become unprofitable at prices that look good in US dollar terms.
A Bell Potter survey of 15 mid‑tier Australian producers showed average total production costs of about $1,170 per ounce. That survey also found five of those 15 producers would be marginal at the prices seen in the article.
The article lists Ramelius Resources, Reed Resources, Norton Gold Fields, Focus Minerals and Saracen Mineral Holdings as having costs at the higher end of the peer group mentioned.
PPB Advisory’s Campbell Jaski said many distressed gold companies failed to manage price risk through hedging. Over the past five years a majority of gold producers reportedly removed their hedge books, leaving them more exposed when spot prices fall.
Saracen’s costs have been pushed up toward $1,600/oz because it’s spending on expanding the Whirling Dervish mine. Management says higher production will come next year and capital spend will fall, improving margins. Saracen also agreed to hedge about 188,000 ounces at an average of $1,698/oz as part of a debt package with Macquarie. Despite that, the company lost close to 18% of its market capitalisation on the Monday referenced in the article.
The article names Navigator Resources and Kentor Gold as two junior miners that went into administration in recent weeks. PPB Advisory’s corporate restructuring specialist Campbell Jaski said he is seeing an increasing number of gold producers seeking help to stay afloat, signalling stress in the sector.
Higher labour costs directly raise production expenses. If the local currency doesn’t decline in step with the gold price (which is priced in US dollars), domestic costs remain high in local terms, reducing margins even when the US dollar gold price looks reasonable.
Based on the article, investors should monitor companies’ reported production costs per ounce, whether they have hedged future production (and at what prices), capital‑spend plans such as mine expansions, and signs of financial stress like requests for corporate restructuring or administrations. These factors influence who remains profitable as market conditions change.
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