Canadian Gold Miners Not Immune to Commodities Pain

July 27, 2012 at 12:14


The latest earnings from some of Canada’s biggest gold producers demonstrate the sector, like base-metal miners and energy companies, are equally susceptible to rising costs, production disruptions and lower resource prices. That’s despite a more resilient gold price.

Prices for a wide swath of commodities have slumped in recent months. Gold, not so much.

But the cost of pulling the yellow metal out of the ground is soaring too, crimping profits. Reserves generally are harder to get to, and costs for everything from labor to fuel have all skyrocketed.

Barrick Gold Corp., the world’s biggest gold miner, Thursday said its second-quarter earnings fell by more than a third after its net costs to produce an ounce of gold soared 59% year-over-year in the quarter to $534 an ounce. That disappointment, which follow the surprise firing last month of Chief Executive Aaron Regent, comes the same day rival Goldcorp Inc., plagued by similar challenges, reported a 45% drop in earnings for the latest quarter.

The tough climate isn’t unique to the gold sector. Earlier this week, resource companies including zinc, copper and coal producer Teck Resources and oil-sands developer Suncor Energy blamed a collision of rising costs and weaker underlying commodity prices for hurting their quarterly earnings.

To be sure, some gold producers are managing the challenges better than others. Agnico-Eagle Mines reported Wednesday lower second-quarter earnings, but stripping away one-time charges, it said earnings were largely flat year-over year, bolstered by stronger gold production and higher realized bullion prices.

In theory, miners of bullion should be generating rising profits, with gold trading around $1,617 a troy ounce currently in New York, up sharply from around $700 five years ago.  However, that spike has driven labor and other operating costs higher. Gold producers are paying an increasing premium on mining expertise and equipment to scour the globe for new and sizeable, but increasingly elusive, reserves and output.

Further, bullion prices are down over the last six months  amid recent signs the yellow-metal has lost, if only temporarily,  some of its safe-haven status among investors as a hedge against  currency weakness, economic turmoil and rising inflationary pressure. At the same time, producers today are more exposed to the impact of gold-price volatility than in the past.

Historically, many miners hedged a large part of their gold production at certain prices, better ensuring predictable earnings. But now, under pressure from investors amid high gold prices, they employ this strategy less frequently. That means producers enjoy more of the upside when gold prices rise, but also they suffer more when prices fall.