High-cost producers feel the pinch
These are nervous times in the gold sector and not just at the small end.
Numerous individual gold 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 ASX-listed companies are facing an uncertain future if these prices persist.
That might be hard to believe, given that Monday's low of $US1425 an ounce would be considered an excellent price for gold over most of the past 20 years.
But local goldminers are facing near-record-high labour costs 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. "There are quite a few gold producers who have cash costs around these levels."
A recent Bell Potter survey of 15 mid-tier Australian producers showed that total production costs averaged $1170 an ounce.
Bell Potter analyst Mark Paterson said five of those 15 would be marginal at the present price.
While none of the analysts spoken to would name the companies they believed to have the highest costs, most in the sector tend to throw up the same names - Ramelius Resources, Reed Resources, Norton Gold Fields, Focus Minerals and Saracen Mineral Holdings, to name a few.
Two junior goldminers 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 producer seeking help to stay afloat.
Aside from rising costs, Mr Jaski said a failure to manage risk through hedging on the gold price was a common feature among the companies in distress.
"Over the past 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 amid that pessimism, it's worth remembering that sometimes there are important details to explain what looks like a devil.
Take Saracen, a small WA goldminer whose all-in costs have been pushing $1600 an ounce. While those sorts of production costs rightly ring alarm bells, part of the cause lies in the fact the company has been spending up on expansion of its Whirling Dervish mine, which will ensure greater production as early as next year.
"Once those key expansion projects are done, come January next year, we are at a stage then that capital spend drops right off and our margins increase," said Saracen managing director Raleigh Finlayson.
Furthermore, Saracen was one of the few gold juniors to take out a hedge under the terms of a debt package signed with Macquarie in December.
That hedge will see Saracen sell about 188,000 ounces of gold at an average of $1698 an ounce over the next couple of years.
Sound sensible? Not enough to prevent Saracen losing close to 18 per cent of its market capitalisation on Monday.