Australian Gold Miners: A Survival Guide

Array
(
    [0] => Array
        (
            [0] => ((PRU))
            [1] => ((KCN))
            [2] => ((BDR))
            [3] => ((DRM))
            [4] => ((EVN))
            [5] => ((NGF))
            [6] => ((OGC))
            [7] => ((RRL))
            [8] => ((SAR))
            [9] => ((AQG))
            [10] => ((NCM))
            [11] => ((IGO))
            [12] => ((MML))
            [13] => ((SLR))
            [14] => ((SBM))
        )

    [1] => Array
        (
            [0] => PRU
            [1] => KCN
            [2] => BDR
            [3] => DRM
            [4] => EVN
            [5] => NGF
            [6] => OGC
            [7] => RRL
            [8] => SAR
            [9] => AQG
            [10] => NCM
            [11] => IGO
            [12] => MML
            [13] => SLR
            [14] => SBM
        )

)

This story features PERSEUS MINING LIMITED, and other companies.
For more info SHARE ANALYSIS: PRU
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

– Gold price remains volatile
– Miners returning to hedging
– All-in costs coming down
– Debt levels remain high

By Greg Peel

The US dollar gold price began 2013 at just below US$1700/oz, fell to just above 1200 in June after a big initial plunge in April, and is currently looking uneasy at just above 1300. To say that the price plunge caught Australian gold miners napping would be an understatement. Their scrambling efforts in the interim to respond to a sudden, unexpected new world are testament.

No more is this evident than in a return to gold price hedging amongst producers. Gold producers have traditionally hedged their future production to provide a stable price environment in which to invest in development and expansion but when the gold price started to run last decade, those producers with low price level hedges still to roll off not only suffered lost profit opportunity but also drew the ire of investors.

Thus the market entered a rare period of non-hedged production, providing for full gold price upside exploitation. But a lack of hedge also means full exposure to downside price risk. While perfect hindsight may have been necessary to reintroduce hedges at the 2011 peak above US$1900, the slow downward drift in the gold price in late 2012 despite QE3 and Japanese money printing could have provided time for producers to think about locking in some profits and protecting committed expenditure on development projects.

But no. A few hundred dollars later, hedging now seems like a good idea again. Pity the horse is now on the horizon. Yet despite the lost opportunity, hedging has become more a case of ensuring survival rather than protecting profits given the gold price remains volatile and further downside risk is prevalent.

Macquarie acknowledges that investors have previously “agitated for unhedged producers” but suggests this needs to be weighed against the role of boards and management teams to act in the best interest of shareholders through the cycle. With gold price risk still palpable, Macquarie believes “best interests” should imply increased gold hedging to enable producers to make sound long-term investment decisions. The analysts feel any such hedge programs will be predominantly tied to specific capital projects from here on.

Among Australian gold producers under coverage, Macquarie can see both Perseus Mining ((PRU)) and Kingsgate Consolidated ((KCN)) needing to increases hedges against planned projects.

BA-Merrill Lynch estimates some 1.1moz of hedges have been put in place by Australian producers since April, representing around 30% of global hedged ounces. Producers now with hedging in place include Perseus, along with Beadell Resources ((BDR)), Doray Minerals ((DRM)), Evolution Mining ((EVN)), Norton Gold Fields ((NGF)), OceanaGold ((OGC)), Regis Resources ((RRL)) and Saracen Mineral Holdings ((SAR)). Each has hedges in place at a level above that of “all-in sustaining costs”, but the best position to be in is to hedge costs while still leaving leverage to gold price upside, Merrills points out. Doray, Saracen and Oceana have covered their cost bases while leaving 50-70% of production exposure, Merrills calculates.

“All-in sustaining costs” or AISC is defined by the World Gold Council as the total of operating costs (mining, processing, administrative, by-product credits and inventory adjustments), royalties, sustaining capex, capitalised stripping and underground mine development, near mine exploration and evaluation, and corporate costs.

Having been caught out, action taken by gold miners to survive the gold price fall have included, along with introduced or increased hedging, mine plan changes and reduced capex and/or deferring spend on growth projects. While mine plan changes have resulted in millions of dollars of costs savings, this has been offset to some extent by production lost, notes Merrills. Companies most effective in implementing changes, in Merrills’ view, have been AlacerGold ((AQG)), which was the first to react by putting high cost Australian assets up for sale, and Newcrest Mining ((NCM)), which has to date implemented the biggest cost-out program via a reduction in high cost ounces and a deferral of capex.

Stocks with strong AUD gold exposure and low costs are the best way to play a gold price rebound, says Merrills. Alacer is the broker’s preferred exposure given a low cost base at Copler in Turkey while Regis offers low cost as well as AUD gold price leverage.

Deutsche Bank has looked at AISC as defined by the World Gold Council and decided Regis, Beadell and Independence Group ((IGO)) generate the best cash margins. It is interesting to note, says Deutsche, that all three are open cut miners. The analysts believe Alacer and Newcrest have the greatest potential for improvement in coming years.

Despite moves by gold companies to reduce costs, Deutsche estimates only a moderate 6% year on year improvement in AISC in FY14. After reporting an average AISC of A$1256/oz in FY13, the analysts forecast the sector will average A$1183/oz in FY14, mostly driven by Alacer and Newcrest. Medusa Mining ((MML)) and Silverlake Resources ((SLR)) are likely to see increased costs on Deutsche’s estimates.

The sector spent an average A$549/oz on growth capex in FY13 but the broker sees this reducing to A$132/oz in FY14 while year on year gold output will increase by 14% to 4.2moz for the nine Australian gold stocks Deutsche covers. Beadell and Independence Group will likely report the lowest AISC in FY14-15 and thus achieve robust margins, while Regis also boasts very competitive costs. Evolution, Silverlake and St Barbara ((SBM)) are the highest cost producers in Deutsche’s view.

The gold price versus all-in costs is one thing, but debt is another. Gold miners retain material debt levels, notes Citi, although maturities are mostly long-dated providing for a window of cash generation which should allow most companies to manage their financial provisions. This is, of course, dependent on the gold price, and if prices continue lower many Australian miners will need to improve productivity and further reduce unit price costs to provide for cash generation, says Citi.

The most indebted gold stocks (net debt to net debt plus equity ratio) in Citi’s coverage universe, in descending order, are Beadell, Newcrest, Kingsgate, St Barbara and Oceana. However relative to market cap, all bar Beadell stand out. With respect to debt maturity, Citi notes Kingsgate and Beadell have quarterly repayments falling due while Newcrest, Evolution and Oceana have substantial maturities in 2015.

With regard to the gold price, Aussie dollar weakness has provided significant relief, notes Citi, and even cause for some optimism. While US dollar gold has exhibited a volatile but distinct downward trend from US$1900 to a current 1300, the Aussie gold chart does not look quite as depressing:
 

But turning around industry cost trends in a sustainable way will take time and collective discipline, warns Citi. In the meantime capital will flow to quality products while poorly managed assets will likely be ushered into the hands of better operators. Citi sees further downside for the gold price in the medium term, with global inflation concerns being pushed further into the future.

Citi forecasts a three-year average gold price of US$1220 and a long-term real price of 1050. The analysts expect gold companies to struggle against this backdrop, with those able to quickly adapt and generate cash in a lower gold price environment faring relatively better.

Australian producers are now much better positioned to take advantage if prices can hold up in the short term, notes Merrills, given the balance between a less perilous AUD gold price and reduced cost bases. On Merrills’ analysis, 2014 breakeven free cash flow has fallen to around A$1400/oz from greater than 1600 for the Australian gold sector. The market nevertheless remains hesitant, with consensus share price targets currently below share prices on average, by the greatest amount in at least three years.
 

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