Brace for impact, Fools. For those with investments in the mining sector, the fourth quarter is shaping up to be a minefield for gold miners.
Gammon Gold (NYSE:GRS) this week reported a surprise loss of $6.5 million for the third quarter, despite an average realized gold price of $855 per ounce, and $14.46 for silver. With corresponding metal prices languishing well below those levels halfway through the fourth quarter, this Fool has a mind to cover his eyes the next time earnings start filing in.
Gammon posted an excruciatingly high cash cost per gold equivalent ounce (GEO) of $735 for the latest quarter, canceling out one of the company's highest production figures ever. Several factors conspired to press costs higher, including a less favorable ratio between the prices of gold and silver, and restructuring costs associated with a workforce reduction of 254 employees at the El Cubo Mine.
Whereas Yamana Gold (NYSE:AUY) relies substantially upon its copper byproduct to keep its gold production costs low, Gammon's key byproduct is silver, which has endured a far more pronounced correction than gold since the metals correction commenced back in March. Unless silver prices swiftly regain a more reasonable relationship with the price of gold, I think Gammon's cost basis will continue to struggle, even as the company executes on further production expansion.
Gammon certainly does not stand alone in reporting significant cost increases. Even economies of scale couldn't prevent costs from climbing to near $500 per ounce for megaminers like Newmont Mining (NYSE:NEM) and Barrick Gold (NYSE:ABX). With Gammon's current production costs essentially matching the spot price for gold, I suggest that Fools look to the lower-cost producers in the industry for some measure of safety until conditions improve. Major miner Goldcorp (NYSE:GG) reported costs of $346 for the third quarter, while intermediate players Yamana and Agnico-Eagle Mines (NYSE:AEM) led the pack with costs of $140 and $240 per ounce, respectively.
I expect dismal metal prices in the fourth quarter to hinder byproduct credits for all miners; the entire group should feel substantial cost pressure until conditions improve. Based upon Gammon's current cost profile, I must suggest that Fools keep digging for better bargains within the gold patch.
Further Foolishness:
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Fool contributor Christopher Barker still thinks Gammon's long-term prospects are strong. He can be found blogging actively and acting Foolishly within the CAPS community, under the username TMFSinchiruna. He owns shares of Agnico-Eagle Mines, Gammon Gold, and Yamana Gold . The Motley Fool has a gilded disclosure policy.
