(FROM THE WALL STREET JOURNAL 12/11/14)
By Alistair MacDonald
Falling oil prices have made it cheaper to mine gold, but the
yellow metal's own three-year price decline is pressuring miners to
come up with new, sometimes creative ways to cut costs and
restructure.
Among other things, miners are drawing up plans to spin off
assets and share administrative functions between companies.
As measured by the Market Vectors Gold Miners Index, the gold
sector has rallied almost 19% since Nov. 4, buoyed by a 7% gain in
gold and by cost reductions stemming from falling oil and a rising
dollar. But analysts and investors say the biggest savings have
already been reaped, and that to keep stock prices rising miners
need to do the one thing they are not doing: merge with each
other.
Gold prices are still down 37% from their 2011 highs, mainly as
inflation, against which gold is traditionally a hedge, has
remained low and investors have moved into securities that offer
yields. That decline has spurred a yearslong scramble to cut costs.
Miners have shaved an average of 20% off the cost of producing an
ounce of gold in the past year, according to Dundee Capital
Markets. That is mainly due to cuts in capital expenditure.
But with gold prices nearing break-even levels for many miners,
some are seeking new solutions in a sector already reshaped by a
three-year downturn. "The low-hanging fruit, on the cost side, has
been picked," said Pawel Rajszel, an analyst at Veritas Investment
Research. Mr. Rajszel said that in recent earnings reports, growth
in savings has slowed.
Gold mining is an energy-intensive industry, which is why HSBC
Securities calculates that a 20% fall in oil could reduce miners'
overall costs by 2% to 6%. But not all miners will feel the full
benefits. Around half of Barrick Gold Corp.'s exposure to oil is
hedged at $91 a barrel. One of Agnico Eagle Mines Ltd.'s most
energy-intensive mines, in the Arctic, shipped most of its oil in
July, before the declines really began.
Analysts also point out a flip side to declining oil: It damps
the inflation that boosts gold.
Another macroeconomic benefit has been the rising dollar, which
lowers costs in countries where miners operate. Yamana Gold Inc. --
which mines in Canada, Brazil, Argentina and Chile -- says that for
every 10% devaluation in these countries' currencies, its mining
costs fall by $40 to $50 an ounce. Yamana's costs averaged $807 an
ounce in the third quarter.
"The dollar and oil, it's a nice win," said Steve Letwin, chief
executive of Iamgold Corp. "But you have to continue to make
sustainable cost cuts, given how volatile gold and oil are."
Given this, miners are looking at other ways to cope with a
lower gold price.
Some miners are considering spinoffs. Yamana announced on
Wednesday that it would place some of its Brazilian assets into a
new company that could be spun off to its investors. Yamana sees
this as a way to separate higher-risk assets from the rest of its
portfolio while allowing investors the option of still owning
them.
Underscoring potential difficulties, the world's largest gold
producer, Barrick, considered spinning off some of its mines but is
not pursuing this option, say people familiar with the matter.
Barrick's failed merger attempt with Newmont Mining Corp. in April
envisaged a spinoff, and executives continued to look at the idea
after talks collapsed. One problem cited was the difficulty of
deciding how much Barrick debt the new company would take on, one
of these people said.
Some bankers say companies are increasingly discussing forming
joint ventures to share costs -- such as power generation,
geologists and regional offices -- for mines that operate near each
other. But recent precedent isn't good. Barrick and Newmont looked
at this in Nevada, but talks have so far gone nowhere.
Sharing operations without combining companies is difficult.
"Each company is going to have its own interest at heart," said
Patrick Chidley, a mining analyst at HSBC Securities.
Some miners are looking at a limited form of merger, hoping to
combine administrative functions where there is geographic overlap,
rather than actual mining operations. Mr. Letwin said Iamgold has
had very preliminary discussions with Newmont about sharing
community- and government-relations functions, as well as some
legal work in Suriname.
Such savings might not be significant enough, say analysts.
Instead, they say, investors want to see more aggressive moves,
such as full-scale mergers and shutting down unprofitable
mines.
The long-expected consolidation in gold has yet to materialize.
While the values of gold miners have fallen, the expectations of
their owners have not.
Kirkland Lake Gold Inc. operates in an area of Ontario that has
more than a dozen peer miners, many of which have just one asset
but corporate offices and teams, said George Ogilvie, the company's
CEO. Few are looking to merge, he said. "Sometimes it takes a
little bit of time to sink in past a mentality of 'it is my
company, maybe we can manage this,'" he said.
If gold prices fall further, consolidation will become
inevitable, Mr. Ogilvie and others say.
"With gold at $1,100 it becomes miserable for some miners, and
consolidation is inevitable," said Doug B. Groh, a fund manager at
Tocqueville Asset Management LP, which owns gold stocks. "This is
the point of no return."
---
Ben Dummett contributed to this article.
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