Friday, 30 May 2014

Gold Miners' Value Destruction Cycle - Citibank - High Grading ?

Barron's report that Citibank's Global Goldbook warns against the gold miners, even at depressed levels, as they are destroying value through high-grading mines, also a contention of Brent Cook's, (although he sees it as longer term bullish for the juniors with quality deposits).
However as reported by PI Financial's Digging the Dirt there is analysis which shows production grades in line with reserve grades. It would be interesting to dig further.
Certainly a mine by mine analysis like PI's graphs is important. At a company level the average grade can be adjusted by scaling up and down individual mines' production with the most appropriate economics for the current gold price, while this questions the longer term furtures of the higher cost and lower grade mines it does not change each mine's economics.
PI note that Barrick and Newmont's production does indicate some high grading.
We should also consider that as gold prices fall and miners take write-downs and reduce reserves of their marginal mines the reserve grade will increase into line with production grade.
Citigroup’s sell-side Global Gold Book is out, and the view on the gold-mining sector’s prospects is dour. The headline says it all: “A Leopard Cannot Change Its Spots.”The firm says the early 2014 rally — which saw Market Vectors Gold Miners ETF (GDX) approach $28 in March before retreating — came as “all easy levers were pulled to rein in costs,” such as the top 10 gold miners’ 25% drop in capital expenditures and the group’s 33% cut to exploration expenditures. Miners also focused on higher-grade ore, which is less costly to mine, and cut some overhead. Not enough, the firm’s Johann Steyn and seven co-authors contend. An estimated 75% of the industry is still burning cash at today’s gold prices, and further cuts are just going to increase unit costs, they write:Cuts to capex and exploration costs, and high grading, are helping margins near term. However, it is a double edged sword. The reason is that gold companies have to spend an increasing amount of capex just to fight a falling production trend and prevent a blow-out in unit costs. For example, the industry’s capex increased 7-fold between 2000 and 2013 (Figure 31). Yet, production decreased 10% and unit costs escalated at a CAGR of 12% p.a. The fall in production, and subsequently rise in unit costs, would have been significantly worse if capex budgets did not increase.

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