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A steep drop in the price of gold will hit profits at mining companies that are already straining under rising costs, and could prompt some miners to rethink their capital spending. Gold companies big and small sold off on Monday as the prospect of central bank gold sales and fears that the US might reduce monetary stimulus tipped spot gold prices off a ledge, to below $1,400 per ounce.
While lower prices are not likely to wipe out the miners' profits, they will squeeze cash flows as companies are still feeling the impact of pricey acquisitions made at the height of the commodity cycle. "Everybody was enjoying the high tide, and now that the tide is coming down you're seeing who's swimming naked, and the thing is, everybody's swimming naked," said Veritas Investment Research analyst Pawel Rajszel, who is broadly negative on the sector.
The S&P/TSX Global Gold index was down 8.0 percent by afternoon, after touching its lowest point since late 2008. Barrick Gold Corp, which was forced to suspend construction on the Chilean side of its huge Pascua-Lama gold and silver mine last week over environmental concerns, dropped 10.4 percent to C$20.55 on the Toronto Stock Exchange.
But rival Goldcorp Inc was down a comparatively modest 4.7 percent at C$28.66. The largest declines hit small and intermediate companies, which typically have less flexibility to focus exclusively on high-quality assets than major producers.
The bullion price drop comes as gold miners try to win back investors turned off by a series of disappointing acquisitions, vowing to clamp down on costs and focus on shareholder returns rather than on growth. Morningstar analyst Elizabeth Collins said she estimates that many producers' costs are well below $1,400 per ounce. But investor pressure to maintain positive free cash flow may prompt some companies to slow down capital spending. "It will just be a general sense of 'hey, we don't want to be free-cash-flow negative year after year'," she said. "'Even if this project makes economic sense ... we're just going to slow down our spending.'"
But others are more downbeat. National Bank Financial analyst Paolo Lostritto said it is difficult to know for sure how much capital spending is discretionary, but he's not optimistic. "We would argue that there's quite a few companies that are losing money at this gold price," he said.

Copyright Reuters, 2013

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