(Minews) - The price of gold has plunged more than a third in the past 3½ years, but the ailing industry is now nervously watching another metric—the price of oil, said the chief executive of one of Russia’s largest gold miners.
In an industry bleeding cash, some gold miners are managing to stay afloat because the oil price has roughly halved, to about $55 a barrel for Brent crude, down from almost $115 barrel last summer.
This won’t last forever, said Vitaly Nesis, chief executive of Polymetal, in an interview with The Wall Street Journal.
“The threat will come from the oil price,” Mr. Nesis said, speaking about the industry and not his own company. “A lot of mines, particularly in Africa and Australia, are only staying afloat because of the decline in the oil price. If oil goes back to $70, $75 dollars per barrel, they will be dead fish.”
In Polymetal’s case, oil-linked costs currently account for about 12% to 18% of total costs compared with 30% of the group’s total in 2013, Mr. Nesis said. All of Polymetal’s mines are generating cash at the moment and will continue to do so even if the gold price falls further, he said.
As for his own company, Mr. Nesis said he was more concerned about oil prices falling so low that it causes social instability in Russia, the world’s largest oil producer.
When oil would return to $70 to $75 a barrel is far from clear. The American shale oil boom has contributed to a global oversupply of crude, and the Organization of the Petroleum Exporting Countries has declined to play its traditional role of cutting production to boost prices.
Standard & Poor’s credit-ratings firm last week forecast that the crude oil price wouldn’t rise to $70 to $75 a barrel until 2017. A potential nuclear deal in Iran could result in a lifting of sanctions and a flood of new oil from the Persian Gulf, depressing prices.
John Meyer, a mining analyst at investment advisory firm SP Angel, said rising oil prices would be “catastrophic” for some gold miners. However, he said the oil price would have to rise above $100 a barrel to spur gold miners to close mines.
“Most gold miners will manage with oil prices at $75 a barrel. [It would give them] sufficient time to get their other costs down,” Mr. Meyer said.
As for the index most gold miners watch—the price of gold—Mr. Nesis said he didn’t see a “significant downside” to prices that have fallen from highs of nearly $1,900 a troy ounce in 2011. On Tuesday, the price hovered below $1,200.
Mr. Nesis said the gold price is likely to remain range bound this year, hopefully, in his view, low enough to wipe out production from a glut of higher cost producers that jumped into the business when the market was hot.
He pointed to the recent bankruptcy of Allied Nevada Gold Corp. and said: “I do hope it’s not the last one.”
“There will be no bottom until capacity is taken out of the market,” he said.
That may take a while. He said it could take 12 to 18 months for 15% to 20% of global gold mining capacity to be shut down.
