As I write this post gold is trading at $1,370 per troy ounce. In the past two months, the price of gold has varied between $1,347.9 and $1,415.1, depending on when this is published.
Ironically, gold, often considered one of the safest assets around, has been the most volatile asset in terms of price for the first half of this year. Of course, this volatility has caused chaos in the mining world if prices drop much further even more pain and confusion could be ahead.
Since 2010, the cost of mining a single ounce of gold has risen as much as 40%, which was acceptable when the price of gold was rising as well. Now that the price of gold is falling, miners are starting to reconsider expensive high-cost projects.
According to Toronto-based analysts at Dundee Capital Markets, the average all-in cost of the twenty largest gold miners in the world was $1,306 per ounce in Q4 2012. In addition, according to Joseph Wickwire, manager of Fidelity Investments’ Select Gold Portfolio fund, about 30%-40% of gold mine production is not cash-flow positive under $1300 per ounce.
Elsewhere, the top five largest miners predict that their all-in cost for 2013 will average between $1,200 and $1,000 per ounce.
The difference between all-in cost and cash cost
When I say all-in cost I mean the costs of direct mining, like getting ore out of the ground, refining and the company’s additional costs like administration, sales, interest cost and taxes. Historically, miners would use the cash cost of production, which is usually much lower and only covers the cost of getting the stuff out of the ground. All-in costs are a much better metric for investors to use to establish how efficient and profitable a company actually is.
On an individual level, how are falling commodity prices affecting companies?
Barrick Gold Corporation (USA) (NYSE:ABX), usually considered the world’s largest gold miner, anticipates 2013 gold production to be in the range of 7.0-7.4 million ounces at an all-in cost of $950-$1,050 per ounce and total cash costs of $610-$660 per ounce.
In addition, the company expects copper production to be about 480-540 million pounds at a cash cost of $2.10-$2.30 per pound and an all in cost of $2.60-$2.85 per pound.
| Metal | Projected all-in cost (average) | Spot price (approx.) | End of year future price | Margin based on end of year future |
|---|---|---|---|---|
| Gold | $1,000 | $1,380 | $1,390 | 39% |
| Copper | $2.73 | $3.17 | $3.20 | 17.2% |
Meanwhile, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) reported within its 1st quarter 2013 earnings conference call that the flowing price changes would have an effect on the company’s full year EBITDA:
| Change | Effect on EBITDA ($US Millions) |
|---|---|
| Copper: +/- $0.10/lb. | $405 |
| Gold: -/+ $50/ounce | $75 |
| Diesel: -/+ 10% | $100 |
| USD change: +/- 10% | $175 |
Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) realized prices of $1,606 per ounce for gold during Q1 2013 and $3.51 per pound for copper during the same period. So far this quarter, the price of gold has averaged $1,415 per ounce, indicating a $286.5 million decline in EBITDA for the company during this quarter from gold production. Furthermore, as I write, copper is currently trading at a price of $3.19 per pound, indicating a $1,296 million fall in EBITDA for the company during this quarter from copper production.
Elsewhere, Newmont Mining Corp (NYSE:NEM) predicted that its all-in cost of gold production per ounce will be around $1,100-$1,200. The company has also based its revenue and earnings prediction on the assumption that the price of gold will average $1,500 per ounce for the year and the price of copper will average $3.5 per pound for the rest of the year, while these are averages, the way gold is currently trending the company’s earnings predictions could be due for a serious downgrade.
Conclusion
Gold miners are being trapped by rising costs and falling commodity prices. This unfortunate trend is sending profits lower and while this is happening, investors should steer clear from gold miners.
The price of gold is not really based on supply and demand. The gold price currently has a greater correlation to Fed policy more than anything else. So, as they cannot set the price of the commodity they sell, gold miners are stuck, they cannot raise the price of their mined gold in order to offset rising production costs, so earnings are unpredictable and if the price of gold falls much further, miners will rapidly become unprofitable.
Overall, with costs rising and the price of gold falling, investors should keep away from miners and look elsewhere for deals.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold.
The article Falling Gold Prices are Starting to Hurt Miners originally appeared on Fool.com.
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