At the end of September, Citigroup put out a research report for the gold and silver mining sector, and if you're an investor in the space it does not make for good reading. The report concentrates on the rising costs but falling revenues of the mining industry and sets out how this is going to/has already affected many gold miners. We all have our own opinions, that's what makes us Foolish; nonetheless it is helpful to know what the big players in the industry think about certain matters, and information within this report could be helpful.
The report uses a current spot gold price of $1,320/oz throughout, so that is the figure I'm referring to when I use the term "at current prices."
The most shocking and surprising element of the report states that at current spot prices ($1,320/oz) up to 98% of gold companies are cash-flow negative, a staggering percentage of the industry. What's more, while the price of gold has fallen around 20% during the period June 2012 to June 2013, the average cash cost per ounce of gold production around the world has risen 11.8%, from $675/oz to $754/oz.
Spiraling out of control
Unfortunately, cash cost per ounce growth of 11.8% is only an average, and the vast majority of companies studied in the report saw their costs increase significantly more. Yamana Gold (NYSE:AUY), for example, saw its year-on-year cash costs rise around 100% through June; the price of gold declined 20% during the same period.
Goldcorp (NYSE:GG) also saw its cash cost per ounce of gold produce rocket by approximately 80%. Barrick Gold Corporation (NYSE:GOLD), on the other hand, did manage to cut costs, 10% this year through June.
Notional cash expenditure
Additionally, Citi's report comments on notional cash expenditure per ounce, or NCE. NCE includes operating costs plus capital expenditures, excluding minority interest in projects, divided by gold produced -- much like the all in sustaining cash cost per ounce.
Actually, while Goldcorp and Yamana Gold have seen their cash costs per ounce spiral out of control during the past year, their NCE per ounce figures have only expanded around 10% and 30% year on year. Barrick's NCE costs have also fallen by around 10% once again.
On the other hand, Randgold Resources (NASDAQ:GOLD), usually considered one of the more efficient gold miners, has actually seen its NCE costs rise the most out of the group reviewed; NCE costs rose on average 60% year on year for the company.
Gold is getting harder to find
According to a speech made back in 2012 by Jamie Sokalsky, CEO of Barrick Gold Corp, gold is getting harder to find (obviously, it was never that easy).
According to Jamie only three large mines were discovered during 2012, as opposed to 11 during 1991. Indeed, despite a 1,000% rise in mining capital spending among the world's top ten gold miners during the last decade, gold production has actually fallen 5% over the same period.
This would be fine if the price of gold had risen to offset declining production and rising capex. However, over the same period, the price of gold has only expanded 350%. Specifically, during 2011 when the price of gold reached its high of $1,900/oz and capex among the world's top ten miners hit a 10-year high of $24 billion production, this did not lead to higher levels of production.
So all in all, gold miners have been spending more and more money to find less gold.
So where to invest?
According to the figures supplied in Citi's report, the miners that are in the best position to ride out the languishing gold prices are Barrick, Yamana, and Goldcorp, despite the fact the Yamana and Goldcorp have noted explosive year-on-year production costs.
However, Yamana's and Goldcorp's cash costs per ounce of gold produced are still below that of Barrick at $500/oz and $700/oz respectively. The miners that are in the worst position are based in South Africa, specifically Harmony, where cash costs per ounce are rising toward $1,200, excluding capex spending and other company admin costs.
Overall, the gold mining industry is in dire straits. Gold miners are spending more and more cash but are finding less gold. In addition, miners are also receiving a lower price for gold sold, despite rising costs.
The outlook for the industry is uncertain, but if costs keep rising and the price of gold keeps falling miners will be in real trouble.