Mining ETFs Vulnerable As Costs Rise, Prices Fall

September 30th at 4:47pm by Tom Lydon

After plunging on prospects of an end to easy money, gold miner exchange traded funds have lost their luster and may continue to languish, with many mining companies just barely making ends meet.

According to a Citigroup research note, global gold on mine unit costs rose 12% year-over-year in the June 2013 quarter. Due to the combination of rising costs and falling gold prices, gold miners have witnessed a quick contraction in margins. [It’s All About Price for Gold Mining ETFs]

Citigroup calculates that 98% of gold companies on are “cash-burning” at spot gold of $1,320 per ounce.

“Gold companies have continued to cut capex, exploration, and corporate costs in order to make ends meet in a lower gold price environment,” wrote the Citi analysts. “Despite these cuts, we estimate that most of the global gold cost curve is burning cash at spot levels.”

Capex costs refer to capital costs. Reducing capex will lower production, and the cost of producing one once of gold will increase.

Citi anticipates some more pains over the short-term.

“We think further cuts are likely over the next 6-12 months as companies try to adjust to a lower gold price environment.”

Gold mining companies, though, are more optimistic about their overall gold production costs. For instance, Barrick Gold (NYSE: ABX) calculates that its all-in sustaining costs at around $900 to $975 per ounce for 2013, compared to Citi’s estimated all-in costs of $1,600 per ounce, reports Nat Rudarakanchana for International Business Times.

The Market Vectors Gold Miners ETF (NYSEArca: GDX) has declined 45.7% year-to-date and the Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ) decreased 47.4%. [Amid Declines, Outflows Seen at Gold Mining ETF]

Market Vectors Gold Miners ETF

For more information on gold stocks, visit our gold miners category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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