North American mining companies are hunkering down to ride out a global economic slowdown; looking to rein in spending and perhaps delay some projects and exploration.
Barrick Gold Corp. and Newmont Mining Corp., the world’s largest gold producers, have been forced to wrestle with volatile commodities prices, fluctuating oil prices, inflation and frozen credit markets. Some analysts believe the industry will lower 2009 production forecasts but the impact primarily will be felt overseas, where most of the world’s gold mines are located.
Executives this week were blunt about the immediate economic outlook.
“Our company and our industry are currently operating in an unprecedented macro business environment, consisting of extreme commodity price volatility, mass portfolio liquidation, global inflation and limited, if any, access to capital,” Newmont Chief Executive Officer Richard O’Brien said.
While major projects already under way will continue, the expansion of existing mines and some smaller projects will likely be put on hold, Argus Research analyst Bill Selesky said Friday.
“With the way commodity prices have come off in the face of a slowing global economy, what the miners are doing is starting to evaluate all their ongoing projects,” he said. “It’s all because of the credit crunch.”
The year began well. Denver-based Newmont reported a fivefold jump in its first-quarter net income as production costs fell and gold prices jumped to a record $1,000 an ounce in March. Barrick swung to a profit.
But the global economy began to falter as the U.S. mortgage crisis spread. Gold has fallen to around $720 an ounce this month. At the same time the costs for diesel used to power giant machines spiked.
Gold is competing with the dollar as a safe haven for capital, said JPMorgan analyst John Bridges.
“Gold supporters, in our opinion, are losing some faith,” he wrote in a research note.
UBS on Friday revised its 2009 forecast for gold to $700 an ounce from $825 an ounce.
“UBS believes gold will remain under pressure in 2009 from a combination of slowing demand for jewelry and disinvestment as inflation slows,” UBS analyst Brian MacArthur wrote.
Newmont this week reported a 51 percent drop in third quarter net income, blaming higher production costs, plummeting copper sales.
Costs applicable to gold sales increased about $100 an ounce, according to the company.
Barrick reported a 26 percent drop in net income largely due to $97 million in impairment charges, but it also faced higher production costs and sold less gold.
Since January, Newmont’s stock price has fallen 45 percent, from a high of $57.55 a share to $26.34 a share Friday. Barrick’s shares have dropped 44 percent from a high of $54.74 to $22.74 a share Friday afternoon.
Peter Munk, Barrick’s founder, blamed forces outside of industry control.
“The redemptions, mutual funds, hedge funds, the re-gearing of the global financial system has created this,” he said. “We’ve never seen such dislocations and, in fact, we’ve never seen such turmoil.”
Compared with other commodities, however, Munk believes gold still holds its luster.
“The decrease in value over the past four or five months in gold is a fraction of what all the base metals, oil, sulfur, wheat, soybean, lead, nickel has gone through,” he said. “Which again, indicates the tremendous monetary value of gold as a means of creating high-level liquidity in terms of panic.”
The Associated Press
Published: November 1, 2008
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