Underwhelming gold mining quarterly figures predominate

Reports from a number of major and mid-size gold miners for the September quarter have shown they have underperformed market expectations as costs rise, and in some cases output has not met forecasts.

Author: Cameron French
Posted: Saturday , 01 Nov 2008

TORONTO (Reuters) -

Stubbornly high production costs have pressured quarterly earnings at major gold miners, adding to what has been seen as an underwhelming reporting period for the industry.

Both Canada's Goldcorp (G.TO) and South Africa's Harmony Gold (HARJ.J) reported core profits on Friday that fell short of analyst estimates, following a similar result from top producer Barrick Gold (ABX.TO) on Thursday.

Smaller players Centerra Gold (CG.TO) and Eldorado Gold (ELD.TO) also released earnings on Friday. Centerra rebounded to a profit of $16.9 million from a year-before loss, while Eldorado's profit rose threefold on higher output and prices.

Goldcorp's net profit actually tripled on the back of a non-cash foreign exchange-related gain of $240 million, but adjusted earnings came in at $64.7 million, or 9 cents a share, down 21 percent from the year-before quarter.

While stiff cost inflation of energy, equipment, and labor have been the norm over the past few years, players such as Goldcorp and Centerra Gold (CG.TO) were also hit by lower than expected production at key mines.

In Goldcorp's case, production at its flagship Red Lake mine in Ontario lagged due to difficulties accessing high-grade ore. At Centerra, disappointing production from its Kumtor mine in Kyrgyzstan forced it to cut its 2008 production outlook. The company also raised its cost guidance.

"The third quarter has not been impressive by the gold mining industry," said Barry Allan, analyst at Research Capital. "There seem to be a lot of operational gremlins that are coming to the surface."

Leading miners Newmont Mining (NEM.N), Gold Fields (GFIJ.J), and AngloGold (ANGJ.J) have also reported underwhelming results this week.

Harmony, meanwhile, saw its earnings drop 79 percent quarter-on-quarter to 8 cents a share, coming in well below the 59 cents forecast of analysts, due in part to rising costs.

GOLD OFF PEAKS

The weaker results come as gold prices posted year-on-year gains of about 25 percent -- Goldcorp's realized price during the quarter was $865 an ounce, up from $685.

However, after peaking at just over $1,000 in March, gold has now declined about 28 percent, while the financial crisis and recession fears have hammered mining stocks and virtually closed credit markets, raising fears about future projects.

Barrick said on a conference call it could defer some non-core projects to preserve capital, while Goldcorp said it would look closely at its capital spending.

The silver lining for miners will be lower costs for energy and consumables such as sulphuric acid, which are already selling at less than half the levels of just a few months ago.

And, with several base metal players already having shut mines and suspended projects, equipment and labor costs for gold producers could also come down.

However, with many costs locked in through long-term contracts, a reversal may take time, analysts warn, and may not match a decline in gold prices.

"Chemical costs and energy costs will be lower, but costs don't turn on a dime. It's a creeping cost," said John Ing, president of Toronto investment dealer Maison Placements.

"The fourth-quarter is not expected to be a barn-burner for the gold industry." (Reporting by Cameron French; editing by Rob Wilson)

© Thomson Reuters 2008.