Friday, July 26, 2013

Two Major Gold Miners Maintain Production Plans for 2013 Despite Drop in Gold Prices

Goldcorp (GG) and Newmont (NEM) recently reported Q2 financial results and outlook for the rest of 2013.  Surprisingly and contrary to some headlines both miners are maintaining production volume and all-in-sustaining cash cost guidance for 2013.  GG and NEM are not shutting mines or significantly cutting capital spending to generate more free cash flow.  Lower by-product (silver, copper, lead, and zinc) prices are being offset by favorable yields and mix compared to their guidance at the beginning of this year.

As a long time Goldcorp shareowner my concern was peaked by a Citibank analysis shown by Zerohedge.  The analysis implies that Goldcorp and Newmont will not generate free cash flow if gold is below about $1,600 per ounce.  There is much more to the story.

GG and NEM are forecasting an All-in Sustaining Cash Cost per gold ounce of $1,050 and $1,150 respectively for 2013.  Their forecasts assume today's commodity prices for by-products, such as silver, copper, lead, and zinc.  All-in Sustaining Cash Cost includes by-product credits and sustaining capital expenditures and excludes depreciation and expansionary and project capital.  These miners could generate free cash flow if they depleted their current reserves and did not spend on new projects.  Of course this is a poor long-term strategy, but one they could pursue if necessary until gold prices recovered.

GG and NEM have strong balance sheets and financing.  GG completed a $1.5B financing in March 2013.  So they can afford to keep investing in new projects.  Never the less, both have revised their capital spending plans.  Each are reducing their $2B+ capital plans for 2013 by only $200M.  

In Q2 each company wrote-off about $2B of value in inventory (leach pads), in the ground (reserves), and Property, Plant and Mine Developments because of the recent drop in gold prices.  NEM, for example used a long term gold price assumption of $1,400 which impaired the book value of their Property, Plant and Mine Developments by $1.5B.  Presumable, if/when the price of gold increases the companies could write up these assets and recognize a gain.  But, I doubt that accounting rules permit what goes down to go back up again in all these cases.

GG and NEM could generate cash with gold below $1,600 per ounce if necessary.  Fortunately, for them it is not necessary and they plan to continue investing in growth projects thereby doubling down their bets on rising gold prices.  GG and NEW stock prices traded up on Friday by 2.1% and 1.5% respectively, while gold was flat.

Also, note that GG and NEW do not nor do they plan to hedge revenue (e.g. gold).  During the gold price smack-down in April and May some alleged that gold miners' hedging activity was contributing to the price decline.  Not from either of these major miners.

All-in sustaining cash cost is a tricky metric.  It is not GAAP.  Many members of the World Gold Council have adopted this industry metric over the last several quarters.  Goldcorp management explained that GG's all-in sustaining cash cost will be much lower in the second half of 2013 due lower sustaining capital requirements than in Q1 and Q2.  The definition of sustaining must be a bit fuzzy.  So best to use this as a guideline and view it over time.

Kinross, Barrick, and Yamana report Q2 earning on August 1st.

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