On Tuesday, Fitch Ratings offered up an ominous forecast for gold miners if spot prices tumble below $1,000 per ounce.
“One danger is that companies live in the false expectation of continued high prices and accompanying asset price bubbles. As history has proven, some companies (commodity companies included) undertake M&A at a cyclical peak, and/or incur substantial expenditure to develop mines with returns based on continued high prices, only to find the company’s peak in capex is less supported by sustainable cash flow as the commodity price declines. This can be exacerbated if the expansions are debt-funded. Newcrest’s (unrated) financial profile is one such example of being caught in this post-M&A scenario. However, based on recent discussions with Fitch-rated issuers, no companies are operating under the false expectation of a rebound in prices. Indeed, recent earnings calls for most gold producers have focused on cash-flow generation in a lower price environment,” the ratings agency said in a note posted by Barron’s.
Some miners may be able to remain profitable if gold prices drop below $1,000. For instance, Barrick Gold (NYSE: ABX) calculates that its all-in sustaining costs at around $900 to $975 per ounce for 2013. In August, Cowen noted Goldcorp (NYSE: GG) and Yamana Gold (NYSE: AUY) would still be to generate positive earnings amid significant gold price retrenchment. Those stocks combine for 19% of GDX’s weight. Yamana’s all-in-cash costs are below $860 an ounce, indicating the company could still be profitable if gold trades only slightly above $900. [30% Plunge Could Mean Disaster for Mining ETFs]
Goldcorp, Barrick and Yamana combine for over 27% of GDX’s weight.
Market Vectors Gold Miners ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of GLD.