By Alex MacDonald and Devon Maylie
Gold miners' share prices tumbled Thursday as gold prices
dropped to their lowest level in nearly three years, heaping more
pressure on mining companies to slash costs and trim production of
the metal.
The NYSE Arca Gold Bugs index--which tracks 16 of the largest
gold-mining companies including Canada-based Barrick Gold Corp.
(ABX), the world's biggest, and South African-based AngloGold
Ashanti Ltd. (ANG.JO, AU)--fell 6.5%, while the price of gold
futures dropped 6.2% to $1,289 a troy ounce in afternoon U.S.
trading. The Gold Bugs index is down 48% since the beginning of the
year.
The slump came as investors digested comments from the U.S.
Federal Reserve that stoked fears about a scaling back of bond
purchases, which have been a crucial support for gold prices.
Investors and mining companies are bracing for gold's steep slide
to continue as the central bank plans to wind down its stimulus
program if economic conditions permit. Bullion metals are
considered a hedge against the inflation and currency weakness that
such stimulus measures can trigger.
In the European session, gold tumbled 4.7% below Wednesday's
settlement price on the spot market to trade as low as $1,286.27 a
troy ounce, its lowest price since September 2010, and the first
time that the metal had traded below the $1,300-an-ounce level
since then.
Market participants Thursday said gold prices around the
$1,300-an-ounce mark will make many miners unprofitable as
production costs are rising, and some will be forced to cut
supply.
"At these prices, marginal projects will look increasingly
marginal," said Steve Poulton, investment manager at Altus
Strategies, an investor in mid-cap and junior gold miners. Mr.
Poulton, however, expects gold prices to rise toward the end of the
year. "At the moment, speculators are betting that other
speculators are expecting lower gold prices, but once this trade
has played out I think we will see more buyers than sellers."
Gold miners said they will proceed with cost cuts and efforts to
improve efficiency.
"The weakness in the gold price highlights the need to press
ahead with the work already under way across our business to
realize further productivity improvements, reduce costs and focus
on free cash flow," said an AngloGold Ashanti spokesman.
African Barrick Gold PLC (ABG.LN) said in April that the
gold-price slump had given the company even greater impetus to cut
costs in order to generate sustainable cash flows.
Gold miners are facing the prospect of profit-margin squeezes
and write-downs on the value of mineral reserves this year due to
the sharp decline in gold prices.
"Gold mining companies have been forced to revise capital
expenditure programs, cut costs and delay new projects," said Nord
Gold N.V. (NORD.LN) Chief Executive Nikolai Zelenski. "It is
reasonable to expect a plunge in production in 2013 due to
declining gold output from existing mines, which are at the upper
limit of the global cost curve."
Mr. Zelenski said that worldwide gold production could also fall
after 2013 since the gold price could take longer than expected to
recover to levels that would encourage further investment in new
gold mines.
Newcrest Mining Ltd. (NCM.AU), Australia's biggest gold producer
by market value, said last week it expected to incur as much as 6
billion Australian dollars (US$5.7 billion) of write-downs due to
gold's sharp slide this year and that it was unlikely to pay
shareholders a final dividend.
"Gold-mining companies have made significant efforts in recent
months as far as corporate governance and capital allocation is
concerned," said Alain Corbani, chief executive of French
investment firm Commodities Asset Management. "Once gold prices
stabilize, the markets will recognize value in the gold mines" that
have made these improvements, he said. The firm's Global Gold and
Precious Fund has 12 million euros of assets under management, down
from EUR18 million when the year began.
--Francesca Freeman and Laura Clarke contributed to this
article.
Write to Alex MacDonald at alex.macdonald@dowjones.com
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