Gold miners will have to counter the bearish environment for gold prices by a slew of measures such as management changes, downsizing exploration plans, rationalization of maintenance expense as far as possible, bypass processing of unprofitable lower grades, and resort to asset sales.
“The net result is likely to be reduced portfolio size and production expectations, while rationalizing spending improves margins and cash flows on the ozs that are produced,” say Citi analysts Brian Yu and Daniel Knauff in their 4Q Gold Preview of gold miners.
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The above ‘shrinking to grow margins’ is just one of three themes that Citi expects gold miners to exhibit in Q4.
Reserves and resource estimates may be reset
Mining companies may also have to reclassify reported reserves and resources in the light of falling gold and silver prices, as well as changes in mine operation due to an altered focus on higher grades.
Lower gold prices are now making it unprofitable to mine lower quality ore, and this would now have to be reclassified as a resource, thus reducing the reserve figures.
According to Citi, most gold miners will likely report lower gold reserves compared to last year. Barrick Gold Corporation (NYSE:ABX), Newmont Mining Corp (NYSE:NEM) and Kinross Gold Corporation (NYSE:KGC) have potential for negative reserve revisions, they say.
Mine plan changes, reclassifications of resource and reserve numbers and lower gold prices that impact mine valuations are some of the factors that could trigger impairment charges.
Citi’s coverage of gold miners
Here’s a snapshot of the two top-rated stocks in their coverage.
Barrick Gold Corporation (ABX)
Barrick Gold Corporation (NYSE:ABX) Buy rated by Citi with a price target of $21.00. It closed yesterday at $19.22.
The company recently successfully carried out a huge US $3B equity offering in difficult market circumstances.
It also announced today it had now agreed to sell the company’s Kanowna gold mine located in Western Australia to the Northern Star Resources Ltd for A$75M ($66.4 million) as a part of its program to dispose off non-core assets.
According to Citi the company is also mulling the disposal of African Barrick Gold, Porgera and Kabanga nickel reserves.
The company is also progressing on its plan to cut costs by $500M annually.
Goldcorp Inc. (GG)
Goldcorp Inc. (NYSE:GG) is also rated a Buy and a price target of $26.00. It last traded at $24.14.
Earlier this month Goldcorp made a hostile cash-and-stock bid valued in the aggregate at $2.6B for Osisko Mining.
According to latest reports, Osisko has hauled Goldcorp to court alleging that, in making its hostile take-over bid for Osisko dated January 14, 2014, Goldcorp misused confidential information.