VANCOUVER The price of gold, down more than a third in three years, is approaching the tipping point where the mining industry would see a spike in the number of producers reducing output or even shutting down operations.
Several mines globally have already suspended output in the past 18 months, but not as many as industry watchers expected as producers focused on slashing costs and reworking mine plans to extract more profitable, higher-grade ounces.
But with bullion's slide this week to a nine-month low of $1,208.36 an ounce, those defenses may not be enough.
"$1,200 is a critical level. The industry has geared itself around $1,200," said Joseph Foster, portfolio manager at institutional investor Van Eck Global. "If it falls below that level, then there are a lot of mines around the world that are really going to struggle."
Van Eck is a major investor in Barrick Gold Corp and Goldcorp Inc and a top shareholder in most other large gold producers.
Production cutbacks and mine closures would spell more financial pain for producers and investors, who have watched gold mining stocks slump 67 percent since September 2011.
And cuts and closures could be swifter and deeper than in the last gold bear market as most miners this time around have not offset the risk of potential losses by hedging - the practice of selling gold forward at a fixed price.
At the end of June, only a tiny fraction of production - around 129 tonnes - was hedged compared with the last bear gold market in the 1990s when hedging peaked at around 3,000 tonnes. The practice fell out of favor when hedged producers were unable to capitalize on rising gold prices between 2000 and 2012.
"TERRIBLE, HORRIBLE PRICE"
In response to weaker bullion, gold miners are estimated to have slashed their all-in cost of producing an ounce of gold to an estimated $1,350 in the first half of 2014, according to data from Thomson Reuters' GFMS metals research team. That was down from $1,696 an ounce for full-year 2013.
Even so, Citibank estimated last month that 40 percent of the gold industry was burning cash at an all-in cost of $1,331 an ounce. [ID:nL2N0PU0NO] But that was at a gold price of $1,290 an ounce. Bullion was last trading at $1,217 an ounce on Wednesday.
"How many guys are going to get up and say this is a terrible, horrible price and we can’t survive at this price? Because we can’t," Doug Pollitt of Pollitt & Co, a Toronto-based brokerage firm, said at the annual Denver Gold Forum last week.
Industry participants were loathe to single out specific operations that could cut or shut down production but high-cost mines are at greater risk.
For example, Iamgold Corp and AngloGold Ashanti Ltd's Yatela mine in Mali had all-in sustaining costs (AISC) of $1,910 an ounce in the quarter to end-June. The operation halted active mining in 2013 due to high costs and weak gold prices but continues to process stockpiled ore.
"This year, as the gold price continues to remain below $1,300 per ounce, we are considering bringing an end to the movement of ore onto the stockpiles and to just continue to leach the ore already on the pad until 2016," Iamgold spokesman Bob Tait said in an email.
Other high-cost producers include St Barbara Ltd's Simberi gold mine in Papua New Guinea, which reported AISC of A$2,300 ($2,039) an ounce in the June quarter. An engineering program is underway at Simberi to improve plant performance.
Iamgold's Rosebel mine in Suriname had AISC of $1,216 an ounce in the three months to end-June.
SUPPORT FOR GOLD PRICES
To be sure, some in an industry known for its optimism see a proverbial silver lining: they believe that a sharp drop in production will help to lift prices.
While gold is also a financial asset that can benefit from uncertainty and inflation fears, some investors and executives say less supply cannot help but put a floor under bullion.
Miners will remain loathe to invest in new projects at gold prices below $1,500, said Douglas Groh, a portfolio manager at Tocqueville Asset Management.
"Two years from now end-2016, 2017 and even into 2018, the markets will recognize that there isn't new capacity coming on stream ... Certainly the gold price will jump," Groh said.
For Goldcorp CEO Chuck Jeannes, the industry is close to "peak gold," an expression that means production is at its all-time high as deposits get harder to find as existing production gets mined out.
"I don't think that we will ever mine as much gold as we do in 2015. That's positive for the gold price," he said in an interview.
(1 US dollar = 1.1282 Australian dollar)
(Editing by Jeffrey Hodgson and Marguerita Choy)