The price of gold is arguably the most critical factor among miners used by management in determining which projects should be pursued and which should be shelved. While the price of gold has seen significant fluctuation over the past few quarters, both Goldcorp (NYSE:GG) and Newmont Mining (NYSE:NEM) hinted in recent earnings calls that the $1200 per ounce level was critical. Beyond the importance of this specific level is the reality that the industry is working hard to become more disciplined and streamlined.
The Newmont case
As a part of its recent earnings release – and follow-up conference call – Newmont projected that for 2013, its all-in sustaining cost of gold would be between $1100 per ounce and $1200 per ounce. This makes the importance of the $1200 level fairly obvious, as the company needs to be able to sell its production for more than its costs if it is to be profitable. Maintaining gold prices above the top of that range is, therefore, critical if the company is to pursue of all its current projects.
Forward-looking CEO and president Gary J. Goldberg explained that the company is using a price of $1400 as a long-term price assumption. There are two takeaways from this comment. First is the fact that the company believes that the price of gold will rise, although the specific time frame was not given. Second, and perhaps more importantly, is the fact that it indicates how management will evaluate both immediate-term and longer-terms projects. As options are made available, the company may need to shift projects back to accommodate its view of the market.
In Goldcorp's earnings call, CEO Chuck Jeannes projected his company's all-in sustaining cost between $1000 per ounce and $1100 per ounce. With that in mind, he later explained how important evaluating each project was, particularly when gold prices fall: "We get down into the $1,200 and below price environment for a period. We have to start looking at whether some of the high cost operations should be sustained at that level and as I said last quarter, the high cost operations are well aware of that and I guarantee you they are working very hard to reinvent themselves so that they can look at different configuration and be free cash flow positive at $1,200."
The overall message, is that Goldcorp is also aware of the importance of both the $1200 price level and of profiling projects to be assured that they are viable for the company's overall objectives.
So far this year, gold has fallen below the $1200 level, but seems to be rebounding strongly. While Fools are not typically technical traders, evaluating commodities without an eye for these indicators ignores an important factor. Along these lines, there appears to be some resistance around $1400 that you should watch carefully. If gold prices can break above $1400 and sustain this level, that will be good news for the gold miners. Newmont will be more likely to take on longer-term projects that are not viable at lower prices, but it will need to exercise caution unless prices climb significantly higher.
You should also watch to see if some of Goldcorp's higher-cost projects are still able to drive down costs, even if prices climb, as it will signal that management's call for discipline applies to all types of environments. If gold cannot break $1400, it may remain range bound, but any extended dip below $1200 should be considered very bearish for miners.