Gold Miners Should See Opportunity In Low-Price Enviornment

After looking at several factors playing into the gold production landscape for the medium-to-long term (begin with Part One here), we offer some conclusions and takeaways.

Gold producers are currently earning cash margins close to levels seen in 2008-09. Since then, there has been a significant increase in the influence of factors like commodity price and exchange rate volatility, regulatory and environmental obligations, availability of finance along with rising labor costs, consumables and energy costs on gold mining.

Most corporate managements have limited control over these factors, which in turn sets a floor to how much cost reduction could be achieved by the gold producers in response to the prevailing bear market, making eventual production cuts inevitable.

The much-anticipated tapering of QE3 in 2014, already set into motion, and its gradual winding down later throughout the year is likely to push bond yields up, result in sharp pull-backs in the stock markets and lead investors to reconsider safe-haven assets like precious metals, which have seen sharp downward price correction in recent months over the Fed’s taper talks.

Given the outlook for supply of gold in the coming years along with the expectation that inflation in developed economies would eventually start to pick up (probably post-2015) once the global economy is back to growth, the next bull market for gold may see a significant upward shift in its long-term price trend compared to what we saw in the previous bull market which lasted for over a decade (2001-2012).

Gold miners should take this low-price environment as an opportunity to rationalize their costs, restructure production portfolios and re-engineer and streamline their upstream as well as downstream processes, involving aspects like supply chain, contracting, and procurement among others, for long-term profitable operations.

Acquisitions of key reserves, at a time when asset valuations face downward revision, along with careful mine planning and resource allocation could help gold miners devise strategies for sustainable and profitable future operations.

by Moonmoon Basu