The Financial Post reports in its Thursday edition that gold and silver miners are beginning to shut down money-losing mines. The Post’s Peter Koven writes that if prices do not recover soon, many more are poised to close in the months ahead, in Canada and elsewhere.
Gold Cost Pressure
A vast portion of the gold industry is struggling to make any money at the current price of US$1,230 an ounce, according to analysts. While precious metal prices are plunging, costs are not falling nearly as fast.
San, Claude and Wesdome reported cash costs well above US$1,000 an ounce in the first quarter, and that is before sustaining capital is included. Other small gold producers in Canada are also struggling with high costs, including Kirkland Lake Gold Inc. (TSE:KGI) (LON:KGI), St Andrew Goldfields Ltd. (TSE:SAS) and Lake Shore Gold Corp. (TSE:LSG).
“Most of these small underground mines are marginal at current gold prices and obviously built for a higher gold price environment,” said Jon Case, a resource portfolio manager at Sentry Investments.
Three years ago, when gold prices first topped US$1,200 an ounce, it would have seemed absurd for companies to be shutting down mines at that price point. The fact that they are now doing it shows just how much cost pressures have transformed the industry. When gold miners began adapting “all-in” costs this year that include sustaining capital, it became clear to investors that the cost to produce an ounce of gold has run way out of control.
Miners are getting some cost relief today, notably from lower oil and steel prices and changes in foreign exchange rates. But it is not nearly enough to offset the rapid decline in price.
Small Miners in a Dire Position
Cost pressure leaves many companies vulnerable to mine closures. The ones in the toughest positions are small miners with high costs, high debt and limited liquidity.
There are several companies operating in Canada that fit that description, experts said. They include San Gold Corp. (TSE:SGR), Claude Resources Inc. (TSE:CRJ), and Wesdome Gold Mines Ltd. (TSE:WDO).
“They’re obviously in a dire position,” said Paolo Lostritto, an analyst at National Bank. “Those companies are on the higher end of the cost curve and they’re the most vulnerable.”
Senior and intermediate miners have plenty of liquidity to ride out the bear market in gold and position themselves for a recovery. But the smaller players, who lack the same economies of scale, are struggling with weak balance sheets and high sustaining and operating costs required to keep their mines running.
Debt Service Concerns
Many of the smaller Canadian producers have debt service concerns. Paolo Lostritto, an analyst at National Bank, said that some levered up to complete expensive growth projects, and some just mismanaged their business in an effort to meet market demand. “And now they’re having to pay the piper,” he said.
Mine closures are already beginning, as Golden Minerals Co (NYSEMKT:AUMN) and Huldra Silver Inc. (CVE:HDA) both shuttered mines in recent days.
Mr. Case said a key question is which companies have the balance sheet to ride out the storm.
“There are going to be shutdowns, which will certainly help put a floor on the gold price over time,” he said.