(Minews) - Gold miners are hoping that the four-year low in the precious metal’s price, recorded in November, marked the end of a torrid period for the industry – and that the outlook will be brighter in 2015.
But many investors in gold fear the miners are still placing too much faith in a cyclical recovery and not making structural changes to put the sector on a stronger footing.
In 2013, gold suffered its first “down” year in more than a decade, trading above $1,650 in January and ending the year at just over $1,200. For most of 2014, the price remained in a range between $1,200 and $1,300, recovering from lows of $1,132 two months ago to close at the end of the year at $1,206.
For the mining groups, this period of price falls resulted in billions of dollars of asset writedowns, large annual losses and urgent cost cutting. Nevertheless, some investors continue to express frustration that the companies have not made more drastic changes, such as cutting more mines or seeking mergers.
Gold miners have already lowered their calculated reserves – the ore that they consider economically viable to mine – in response to the price falls. But many reserves are still unprofitable at recent spot prices, according to Catherine Raw, portfolio manager at BlackRock Natural Resources.
“This is a huge challenge Until the industry accepts this, it is not going to attract investment,” she told the Mines and Money conference in London last month. “We need to start seeing some really painful decisions being made.”
Ms Raw suggests some of the miners’ restructuring efforts to date have been less than might meet the eye. For example, while overall costs for the largest North American gold miners have sunk since 2011, this has happened because of cuts to exploration budgets and lower “sustaining” capital expenditure.
Operating costs and back-office administration costs have actually risen, she says.
Another bugbear is the state of gold miners’ balance sheets, following an aggregate $70bn of borrowing over the past decade to fund projects and deals. Falls in the gold price have cut the companies’ cash flows and made it more difficult for them to pay down their debt.
Some companies “have so much debt that they cannot manoeuvre to take advantage of the low valuations”, suggests Joe Foster, portfolio manager of Van Eck Gold Funds.
Larger mining groups have entertained the idea of restructuring to relieve some of their debt burdens. AngloGold unveiled a debt reduction plan involving a $2.1bn rights issue and demerger, but investors shot the idea down within days because of the dilution of their holdings.
Barrick Gold, the Canadian miner, has sold some smaller mines and, in 2013, raised equity to pay down debt. It also considered a merger with Newmont Mining of the US – including a spin-off of international assets – but negotiations broke down amid acrimony in April.
Whether the larger mining groups have to revisit such plans in 2015, or sell more choice assets, is likely to depend on whether gold sinks far below its current “floor” level of about $1,200 an ounce, analysts suggest.
However, smaller companies, some of which own just one asset, have little room for manoeuvre, as they cannot spread their back office costs across several mines.
George Ogilvie, chief executive of Kirkland Lake, a Canadian miner, says: “I think we are going to see more M&A activity. Investors will start demanding that companies start consolidating.”
According to Mr Foster, disposals by large companies and deals by some of the more robust mid-cap miners mean that the “shape of the industry will change”. Some of the more successful mid-caps, including London-listed
Randgold Resources – one of only two gold miners whose shares outperformed the bullion price during gold’s bull run, according to Investec – are now talking about acquisition options.
Joe Wickwire, manager of the Fidelity Advisor Gold Fund, says consolidation is inevitable. “The industry is going to get smaller,” he argues. “There are assets out there that are probably better served in someone else’s hands.”
One factor in the gold miners’ favour is that the price fall means they are now a more leveraged play on the performance of the metal, and so could outperform bullion if the market does rise.
But investors, having put up $86bn in fresh equity capital since 2002, based on Investec’s calculations, have been burnt by poor returns from the sector.
Over the past two years, the combined market capitalisation of global gold miners has fallen from a peak of about $260bn to $80bn, the broker estimates. As a result, while the price of bullion has fallen 30 per cent over the period, the FTSE Gold Mines index is down nearly twice that amount.
Evy Hambro, chief investment officer of the equity team of BlackRock Natural Resources, says the mining companies will have to work hard to change investor perceptions.
“You are going to need to be persuading investors to sell their shares in Microsoft or Apple to be able to help you finance your way out of trouble,” he told the Mines and Money conference. “That is a major challenge for the industry.”
