Without Low-Hanging Fruit, Gold Miners Focus on Quality

With the price of gold down from about $1,600 per ounce at the end of 2012 to hover at around $1,370 per ounce today, miners of the precious metal have been shuttering mines around the world. That's not the case for the Cresson Mine, the single-largest gold mine in the state of Colorado. AngloGold Ashanti (ADR)  (NYSE: AU  ) , which has 100% interest in the field, has decided to increase capacity and ramp-up production now instead of abandoning earlier plans for an expansion, plans that were created during more bullish times for the precious metal.  

Indeed, the Cresson mine currently produces some 200,000 ounces of gold annually. With the expansion, the capacity will increase to 375,000 ounces each year beginning in 2015. According to a recent report  on NPR, the reason that AngloGold has been able to not only continue operations but also expand mining activities in Colorado is because of costs. A combination of low diesel fuel and labor costs coupled with what is still considered "abnormally high" prices for gold, according to the report, make the Cresson mine still economical. Plus, AngloGold has been vehemently lowering its cost structure.

Capex plans for 2013 were recently softened from $2.1 billion to $1.9 billion, and the company has suspended its dividend until market conditions strengthen. It also extended debt maturities with the issuance of $1.2 billion in new debt securities that expire in 2020. The company is saddled with $2.8 billion in net debt and its net-debt-to-EBITDA ratio is approximately 1.6.  

In 2012, US projects including the Cresson mine accounted for 22% of the company's capex. In 2013, AngloGold expects that Cresson will represent 35% of the $503 million in capex directed at the Americas, according to the company's annual report. AngloGold reported a return on equity of 18% in 2012, when results were hurt by lower production amid a strike in South Africa. 

Copper and gold

The 25% decline in the price of gold (at its worst point this year) hasn't been easy on any gold miner, despite the fact that the industry is adjusting. Colorado-based Newmont Mining (NYSE: NEM  )  suffered a $2 billion net loss, or a loss of $4.06 per basic share in its second quarter as a result of weaker gold and copper prices  .  Newmont's in the process of eliminating greater than one-third of its workforce, and cut spending by $362 million in the first half of 2013 versus the year-ago period.  

Newmont has been hurt by lower production at its mines across South America, Australia, New Zealand, Indonesia and Africa. Meanwhile, a bright spot in the second quarter was Nevada, where production climbed 1% amid higher production and greater quality at its Emigrant and Phoenix mines. Like AngloGold, Newmont recently lowered its 2013 capex plans. The company has earmarked $2.2 billion to $2.4 billion for 2013 capex, 40% of which will be directed at developmental and expansion projects in places like Nevada and Mexico.

Unlike AngloGold, Newmont continues to pay a dividend, yielding investors 3.1%. It carries $12.2 billion in total liabilities on its balance sheet and generated $293 million in free cash flow in the second quarter. The shares are down more than 30% year-to-date, which all things considered helps to explain the company's cash-strapped position and aggressive cost-cutting initiatives.

Market check

The price of gold has recovered some, climbing some 14% since June lows fueled by the unrest in Egypt, which is prompting a flight to safety, according to Dennis Gartman of The Gartman Letter recently cited on CNBC  . When gold prices strengthen, I believe the thing to look for is whether or not these companies have streamlined operations, become more efficient and improve their credit profiles, which have been damaged alongside the falling price for gold. Nonetheless, the future is uncertain and as pointed out in the NPR report, weaker demand from India or China could be a game changer along with slow production at some of the most productive mines -- including the Cresson.  

Cost cutting 

Cost cutting is also the name of the game at Barrick Gold (NYSE: ABX  ) . The company just sold its Barrick Energy business, and is in the process of divesting some of its Australian assets. Barrick lowered its 2013 budget and costs by $2 billion, which only served to offset the equally dramatic fall in the price of gold and copper. Sentiment on copper has been negative for months, but stronger economic conditions in China, where much of the demand for the metal stems, could reverse Barrick's fortunes   . 

It just refinanced $3 billion worth of debt, and still has $1.8 billion in debt maturing through 2015. The company is focused on those mines that are generating free cash flow and has no intentions of starting new mines. In fact, Barrick has cut or postponed $4 billion in capex over the next four years. After generating $896 million in operating cash flow in the second quarter and with $14.4 billion in debt, the company hasn't abandoned its dividend payment altogether. But it did recently lower the quarterly distribution to $0.05. 

Conclusion

Companies that operate in the commodities sector don't have control over factors such as the price for the raw material or precious metal that they produce. In the case of AngloGold, the company is responding to the market conditions and limiting investments to high quality and efficient mines. Newmont is focused on cost cutting but it needs to return to profitability before I would consider it as an investment; and Barrick is mired in too much debt at the moment. 

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