Cost Cuts Help Gold Names Now, But Trouble Looms

Given our view that the gold price does not follow conventional cost-curve economics, and that gold companies are ‘price takers’, we continue to expect the next few years will be characterised by high-cost asset disposals, reduced capital budgets, lower exploration expenditure and balance sheet recapitalisation. This will be as companies try to adjust to a lower gold price environment.

   Even though we view this action as correct, and inevitable, it’s somewhat of a double-edged sword. The reason being that gold companies have to spend an increasing amount of capex just to fight falling production trends and prevent a blow-out in unit costs, in our view.
   For example, global gold capex has increased 10-fold over the past decade, yet production has fallen 10% during this period. Unit costs have risen at a CAGR of 14% during this period. It is our view that unit costs would have risen far quicker had it not been for the vast increase in capital expenditure.
   It is because of this that we caution that a slowdown in capex will invariably result in a fall in production, which in turn will lead to a faster rise in unit costs. Whether or not capex is cut, we see both scenarios as bad for shareholders. There seems to be no easy way out.
   In addition, the recent increasing head grades that we have observed across the global gold space is an unsustainable mining practice that can have further detrimental effects on future mine plans and ore bodies.

Cost Cuts Help Gold Names Now, But Trouble Looms