You are here

Gold mining CEOs told to fix slump as investors prove restless

Section: Daily Dispatches

By Thomas Biesheuvel
Bloomberg News
Tuesday, December 11, 2012

http://www.bloomberg.com/news/2012-12-12/gold-ceos-told-to-fix-slump-as-...

Gold-mine investors are losing patience with management in the $60 billion industry as their shares head for the first back-to-back annual slump since 1998, even as the metal completes a dozen years of gains.

Producers from Canada's Barrick Gold Corp., the world's biggest, to Newmont Mining Corp. of the United States are failing to control expenses. The average cost to extract an ounce of gold by the largest miners jumped 23 percent to $584.70 in 2011, data compiled by Bloomberg show. In contrast, silver production costs fell 12 percent to the lowest since 2007, the data show.

Money managers including billionaire investor George Soros reacted by boosting stakes in physical gold, pushing gold-mine executives to resign, or shifting into silver. Direct holdings of the metal reached a record 2,629.3 metric tons Dec. 10, valued at $145 billion, after more than tripling in five years, data compiled by Bloomberg show.

"Investors are very critical, voting with their feet and pushing management teams to resign," said John Wong, a portfolio manager at CQS Group's New City Investment Managers, who increased his silver holdings. "You can tell from the way investors sold Barrick down that they are on short fuses."

... Dispatch continues below ...



ADVERTISEMENT

Fred Goldstein and Tim Murphy open All Pro Gold

Longtime GATA supporters Fred Goldstein and Tim Murphy have brought their many years of experience in the precious metals and numismatic coins to All Pro Gold as metals brokers who specialize in the delivery of gold and silver bullion bars and coins as well as numismatic gold and silver coins. Fred and Tim follow these markets closely and are assisted by a team of consultants in monitoring market trends. All Pro Gold offers GATA supporters competitive pricing on all bullion products and welcomes inquiries. Tim can be reached at 602-299-2585 and Tim@allprogold.com, Fred at 602-799-8378 and Fred@allprogold.com. Ask about their ratio strategy and the relationship of generic $20 dollar gold pieces to 1-ounce gold bullion coins. Visit their Internet site at http://www.allprogold.com/.



Barrick replaced Chief Executive Officer Aaron Regent with Chief Financial Officer Jamie Sokalsky on June 6, saying it was "disappointed" in the share performance after costs rose and production dropped. Since then the stock lost another 19 percent as the company missed earnings for four straight quarters amid delays and cost overruns at its Pascua-Lama project on the mountainous Argentina-Chile border.

At least five more gold CEOs lost their jobs this year.

Silver producers comprise three of the five biggest holdings in Wong's $94 million Golden Prospect Precious Metals Ltd., led by Silver Wheaton Corp. In 2010 four of the funds' five largest holdings were gold producers.

The NYSE Arca Gold BUGS (HUI) Index of gold mining companies has declined 24 percent in the past two years compared with a 4.4 percent gain in the MSCI World Index. The performance is a result of an "appalling track record of value destruction" by management teams, according to Evy Hambro, manager of BlackRock's $12 billion World Mining Fund.

Hambro's biggest holding is Rio Tinto Group, which produces gold only as a byproduct from copper mining.

Gold producers make up six of the eight worst performers in the S&P Global Resources index this year, with IAMGOLD Corp., Harmony Gold Mining Co. Ltd., and AngloGold Ashanti Ltd. posting the biggest declines.

The Arca benchmark gold index fell about 12 percent this year compared with a 9 percent gain in gold's price. The Bloomberg World Mining Index is little changed, while key materials such as iron ore and thermal coal dropped 11 percent and 16 percent respectively. Copper has gained 6.7 percent.

Gold companies also face competition from gold-backed exchange-traded products, or ETPs, as investors bet on bullion without the operational risks from mining.

Billionaire Soros boosted his stake in exchange-traded products backed by gold in the third quarter. Soros Fund Management increased its investment in the SPDR Gold Trust, the biggest fund focused on the metal, by 49 percent to 1.32 million shares as of Sept. 30 from three months earlier, a U.S. Securities and Exchange Commission filing showed.

"We are at a watershed where the message from shareholders is very loud and clear: 'We do not like what you do,'" said Markus Bachmann, Johannesburg-based manager of the Craton Capital Precious Metal Fund. "The costs are too high. The returns are not good enough."

To be sure, producers with good management and operations may be set to benefit from slowing cost inflation and rising gold prices, investors say. Gold may advance to $1,850 an ounce next year, according to the median forecast of 24 analysts, while cost inflation of 19 percent in the past 12 months may ease as the mining industry curtails expansion in response to faltering Chinese demand.

"There are signs that the cost inflation is contained, which will help the companies," said Bachmann. "By and large we will see a healthier industry next year."

Kinross Gold Corp., Canada's third-largest producer, fired CEO Tye Burt in August, saying a change of leadership was needed to guide the company through capital allocation and project development improvements. In October, Kinross said CFO Paul Barry will leave the company.

"Kinross was in fact the first of the majors to respond decisively in early 2012 to industry-wide cost escalation -- first by resequencing our growth projects to reduce our overall capital commitments and second by pausing a large build at our Tasiast expansion project in order to review smaller, less capital intensive options," J. Paul Rollinson, Kinross CEO, said in an e-mailed statement.

"As a third step after I assumed the role of CEO in mid-year we reduced our capital spending by $200 million from our original 2012 forecast and are continuing to look for every opportunity to reduce costs," Rollinson said.

Barrick said it's continuing a review of its assets and has deferred about $3 billion in capital expenditure. All alternatives for investing shareholder capital will compete against each other to allow it to return more to shareholders in the future, repay debt, and invest in assets.

"Our overriding objective is to translate Barrick's strengths and results into higher shareholder returns," Barrick said in an e-mail. "We intend to deliver this through a disciplined capital allocation approach that maximizes risk-adjusted returns on investment and free cash flow."

Newmont, the largest U.S. gold producer, was one of the first companies to respond to costs rising across the industry, the company said in a statement. That included reductions in operating costs, sustaining capital, general and administrative costs, development capital, and exploration and advanced projects, it said.

Precious metal producers spent a record $53 billion on deals in 2010 and a further $43 billion last year as record gold prices spurred deals. That led to writedowns that are an admission of overpaying.

Newmont took a $1.61 billion writedown on its Hope Bay mine in Canada in February after putting the project on hold. The company gained control of the mine as part of its C$1.5 billion ($1.5 billion) acquisition of Miramar Mining Corp. in 2007. Kinross took a $2.49 billion writedown on its Tasiast mine in Mauritania, which it bought as part of its all-stock C$8 billion acquisition of Red Back Mining Inc. in September 2010. Agnico-Eagle Mines Ltd. wrote down its Meadowbank project in northern Canada.

"The lack of capital discipline is probably the biggest issue," Wong said. "They've all relied on the gold price to bail them out, which actually is a very bad way to manage a business."

* * *

Join GATA here:

Vancouver Resource Investment Conference
Sunday-Monday, January 20 and 21, 2013
Vancouver Convention Centre West
Vancouver, British Columbia, Canada
http://www.cambridgehouse.com/event/vancouver-resource-investment-confer...

* * *

Support GATA by purchasing DVDs of our London conference in August 2011 or our Dawson City conference in August 2006:

http://www.goldrush21.com/order.html

Or by purchasing a colorful GATA T-shirt:

http://gata.org/tshirts

Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009:

http://gata.org/node/wallstreetjournal

Help keep GATA going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:

http://www.gata.org

To contribute to GATA, please visit:

http://www.gata.org/node/16



ADVERTISEMENT

Opinion Around the World Is Changing
in Favor of Gold -- Find Out Why

When Deutschebank calls gold "good money" and paper "bad money". ...

http://www.gata.org/node/11765

When the president of the German central bank, the Bundesbank, pays tribute to gold as "a timeless classic". ...

http://www.forbes.com/sites/ralphbenko/2012/09/24/signs-of-the-gold-stan...

When a leading member of the policy committee of the People's Bank of China calls the gold standard "an excellent monetary system". ...

http://www.forbes.com/sites/ralphbenko/2012/10/01/signs-of-the-gold-stan...

When a CNN reporter writes in The China Post that the "gold commission" plank in the 2012 Republican platform will "reverberate around the world". ...

http://www.thegoldstandardnow.org/key-blogs/1563-china-post-the-gop-gold...

When the Subcommittee on Domestic Monetary Policy of the U.S. House of Representatives twice called on economist, historian, and gold standard advocate Lewis E. Lehrman to testify. ...

World opinion is changing in favor of gold.

How can you learn why and what it will mean to you?

Read the newly updated and expanded edition of Lehrman's book, "The True Gold Standard."

Financial journalist James Grant says of "The True Gold Standard": "If you have ever wondered how the world can get from here to there -- from the chaos of depreciating paper to a convertible currency worthy of our children and our grandchildren -- wonder no more. The answer, brilliantly expounded, is between these covers. America has long needed a modern Alexander Hamilton. In Lewis E. Lehrman she has finally found him."

To buy a copy of "The True Gold Standard," please visit:

http://www.thegoldstandardnow.com/publications/the-true-gold-standard