* Diversified miners delay projects, could slow cost
* Cost cuts to give boost to bruised gold seniors
* Gold miners still need to prove lower costs, higher
* Analysts see dividends, earning growth as key to recovery
By Julie Gordon
TORONTO, Jan 6 Sagging demand for non-precious
metals - a trend that's beyond the direct control of Canada's
embattled gold producers - is shaping up as their best hope for
recovery in 2013 after a year that battered their share prices.
The key to restoring investor faith in the gold miners is
reining in runaway cost inflation, experts say. To that end, a
weakening of prices for base metals, coal and iron ore comes at
just the right time for big bullion producers, who can no longer
use surging gold prices to justify unrestrained spending.
Barrick Gold Corp, Goldcorp Inc and their
top-tier peers are scrambling to pare spending and return more
cash to their shareholders even as they gingerly push ahead with
major new gold developments.
"There may be a catalyst here and that is cost
stabilization," said Adam Graf, a mining analyst with Dahlman
Rose in New York. "Because the rest of the mining industry is
going to be weaker in 2013, that should benefit the gold guys."
Spot gold prices closed 2012 with a gain of about 7
percent, extending the metal's bull run to a 12th year. But the
S&P/TSX Global Gold index, reflecting the sagging
share prices of the world's top gold miners, ended the year with
a decline of nearly 16 percent, its biggest annual drop since
"The market has just completely lost faith in the sector,"
said Graf. "And what's driving the negative sentiment is the
perceptions of runaway cost inflation."
Mining costs have sky-rocketed over the past few years as
strong demand from China and India pushed metal prices to
historic highs, prompting a global mining boom and putting
pressure on an already tight labor and equipment market.
But growth is slowing in China, and that, along with
economic uncertainties in the United States and Europe, has
weighed on base metal, iron ore and coal prices, leading to mine
shutdowns and project deferrals around the world.
In 2012, diversified miners delayed well over $65 billion in
planned capital expenditures, according to global accounting
firm PwC. BHP Billiton, for example, shelved its
multi-billion dollar Olympic Dam copper-uranium mine expansion,
citing rising costs and weaker commodity prices.
With fewer projects competing for the same resources, the
cost of labor, engineering and equipment is bound to soften --
good news for gold miners, who are pushing ahead with new mines.
Indeed, with the price of gold, widely seen as a safe-haven
investment, expected to remain relatively strong over the next
few years, companies that can cut costs and boost profit margins
will fast become very attractive, analysts say.
"In 2013, we'll be looking at things like dividend
increases, growth in earnings per share," said John Ing, a gold
analyst at Maison Placements in Toronto. "And I think that will
restore the enthusiasm for the gold miners."
From September 2007 to September 2011 gold nearly tripled
from around $680 an ounce to an all-time high above $1,920. That
drove a period of "growth at any cost," as gold miners looked to
boost production to capitalize on rising prices.
But gold fell off its peak in late 2011, and has since
traded in the $1,500 to $1,800 per ounce range even as miners'
costs kept rising.
That has weighed on the shares of the world's largest gold
miner, Barrick, which ended 2012 down 25 percent. Goldcorp and
Kinross Gold Corp fell 19 percent and 17 percent
In fact, of the 10 largest companies on the S&P/TSX Global
Gold Index, only Yamana Gold Inc managed to squeak out
a gain in 2012, climbing 14 percent. Barrick, by contrast, is
now trading at 2009 levels.
Investors, angered by pricey takeovers, huge cost overruns
on new mines and narrowing profit margins, demanded change.
Boards responded. Two top chief executives, Aaron Regent of
Barrick and Tye Burt of Kinross, were ousted over the summer of
2012, while Richard O'Brien is set to leave Newmont Mining Corp
in March. The shake-ups herald a shift in strategy.
"These ambitions of growth have been dashed by the reality
that mega-projects bring mega-problems," said Ing. "I think the
gold miners now have a new religion and that is emphasizing on
Barrick's new CEO, Jamie Sokalsky, has made good on a
promise of more disciplined spending, deferring some $3 billion
in capital allocation over four years. Working against that
restraint is the massive Pascua-Lama gold project on the border
of Chile and Argentina, where development is now expected to
cost more than $8 billion.
Kinross too has announced a cost-cutting plan, while
Goldcorp is currently reviewing all of its capital projects.
Indeed, most major global gold producers have vowed to clamp
down on spending and focus on profit margins, even as they push
ahead with new mines around the world. Yet the details on how
they will keep a rein on costs, beyond benefiting from a broader
industry slowdown, remain unclear.
Add in worries over ever-stricter environmental rules,
higher royalty and tax demands from governments and growing
opposition from local communities, and for some investors the
potential rewards are simply not worth the risk.
"It's just getting harder and harder to be a mining company,
more environmental restrictions, more government restrictions,"
said David Baskin, president of Baskin Financial in Toronto.
"It's just tough," said Baskin, who does not hold any gold
mining stocks and said he has no plans to buy in 2013.
Despite the nagging concerns, many analysts and industry
players believe the top tier of gold miners have hit a bottom
and they see an opportunity to buy high-quality gold ounces in
the ground for cheap - if miners can get those reserves out
without breaking the bank.
"I really think the worse of the news is behind the gold
operators. I can't imagine them being hated any more than they
are right now," said David Harquail, chief executive of
Franco-Nevada Corp, a gold-focused royalty and stream
"It's the contrarian play," he added. "But I am absolutely
confident that it is going to be the money-maker."
(Additional reporting by Allison Martell in Toronto; Editing by
Frank McGurty, Jeffrey Hodgson and Kenneth Barry)