Compania de Minas Buenaventura SA (ADR) (BVN), Newmont Mining Corp (NEM), AngloGold Ashanti Limited (ADR) (AU): Added Pressure on These 3 Precious Metal Producers

Restructuring is necessary

Now, let’s take a look at the third-largest gold producer in the world, AngloGold Ashanti Limited (ADR) (NYSE:AU). The firm produces most of its gold in South Africa and continental Africa, which tend to have higher-cost gold. This is why AngloGold Ashanti Limited (ADR) (NYSE:AU)’s earnings and cash flows are especially vulnerable to corrections in gold prices.

AngloGold Ashanti Limited (ADR) (NYSE:AU) gold production decreased 8.4% year-over-year to 899,000 ounces, while unit cash costs increased 17%. AngloGold Ashanti Limited (ADR) (NYSE:AU) expects modest production increases over the course of 2013 stemming from both current and new operations.

Sequentially production rose 4.7% and costs fell 7.5%, respectively, as strike activity at the firm’s South African operations ceased and cost cuts came in near AngloGold Ashanti Limited (ADR) (NYSE:AU)’s expectations. AngloGold Ashanti Limited (ADR) (NYSE:AU) reduced costs by 24% to $65 million, and expects an additional $50 million in savings over the course of 2013.

However, Goldman Sachs recently stated that AngloGold is likely to require restructuring of some sort in 2013 and 2014 as it believes any attempts to reduce costs by reducing labor and closing mines could be met with industrial action or government interference.

The firm has made progress on several projects. The Kibali and CC&V projects have shown positive signs and the Tropicana Gold Project in Australia is expected to come online by the end of 2013.

Bottom line

An inability to enhance profitability when gold prices are still high by historical standards is a poor sign for investors. All all three cases discussed here, lower production may be reversed and costs may be pushed down, but profitability will be difficult to enhance without a substantial increase in gold prices.

Newmont Mining Corp (NYSE:NEM) and Compania de Minas Buenaventura SA (ADR) (NYSE:BVN) are working on several major expansion projects that are scheduled to come online during the next few years, but execution risk is another important factor for investors to consider. Also, geopolitical risk is high in Compania de Minas Buenaventura SA (ADR) (NYSE:BVN)‘s case, as operating income is generated from exposure to a single country, Peru.

One should monitor AngloGold’s cost-cutting efforts carefully as it may a have a boomerang effect. Its non-African gold mines in the US, Brazil, Argentina, and Australia are promising, as they tend to feature lower production costs and diminished political risk. However, lower gold prices may spoil AngloGold’s strategy, as its cash flows are very vulnerable to even a modest correction in prices.

The article Added Pressure on These 3 Precious Metal Producers originally appeared on Fool.com.

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