With gold and silver prices surging over the last several weeks, one would expect the shares of gold mining companies to rally right along with the precious metals. However, there are several key players across the industry that didn't receive this natural boost from higher metal prices. What gives?
Beneath the Surface
In many cases, the fates of mining companies can't be determined simply from external developments (like changes in the gold price). Even when these outside events have a direct impact on a miner's business, there are a host of internal dynamics that mean different miners may be affected differently by external influences. So much of what goes into the financial health of a mining company has to do with their costs, regardless of where prices are and how much output they see.
More so than stronger metal prices, cost profiles are the metric that mining companies must use to determine the best course of action. Business models in the mining industry do take into account the current (and expected future) market for the resource being mined, but obviously this factor is completely out of their control. What they can control, however, is how their costs are structured.
Cutting and Controlling Costs
Let's take a look at a few different strategies mining companies have employed to keep their costs down.
Royal Gold (NASDAQ:RGLD) enjoys benefits of being streaming company, an increasingly popular business mode. This means that it doesn't have to develop a mine itself; the company provides cash payments to other miners upfront in exchange for the right to future streams of precious metals. Royal Gold pays a reduced price on the streamed metals in this arrangement.
For this reason, Royal Gold doesn't have to eat the expensive overhead costs of operating mines. It partners with even bigger firms like Barrick Gold (NYSE, TSX, SWX:ABX) and Teck Resources (NYSE:TCK) to secure future metal streams at a fraction of the cost—as low as $370 per ounce of gold sold. This is a strong example of how the company's stock price can fall in the present while its underlying business fundamentals for the future actually improve at the same time.
Last year, Royal agreed to several major streaming deals. According to The Motley Fool, "In 2015, the company inked a $610 million streaming deal with Barrick Gold, a $175 million deal with New Gold, a $525 million deal with Teck Resources, and a $130 million deal with Golden Star Resources."
Meanwhile, silver miner Coeur Mining (NYSE, SWX:CDE; TSX:CDM) is accepting the reality of a period of treading stagnant water in order to get its costs back in line for profitability. Even as the company bleeds money in the near-term, it has gradually reduced its all-in sustaining costs for each ounce of silver from $19/oz to $16.50/oz. This still leaves them vulnerable unless silver prices rally better than 6%. However, the firm is positioned to stay above water as it continually reduces it costs.
South African Miners
In the case of South Africa's battered (yet essential) mining sector, water use is the big cost-cutting measure. Water is a surprisingly scarce resource in many parts of the world, and a widespread drought is making things much harder for miners in South Africa. Mining projects are very water-intensive, but mines are also in a unique position to manage and treat important underground aquifers. Flipping the water shortage on its head by treating groundwater supplies could be one of the keys to turning around the country's mining woes.
We're also seeing cost-cutting in South Africa in the form of big layoffs. Between labor disputes, safety concerns, and dwindling metal prices, the once-lucrative platinum and palladium mines in South Africa are now being forced to downsize. Major PGM miner Amplats, a division of Anglo American (LON:AAL), has announced job cuts that will affect some 1,000 employees, choosing to cut costs through greater mine mechanization and automation.
Sometimes, expansion can actually be a cost-cutting measure by increasing a miner's economies of scale. This is the approach that Tahoe Resources (NYSE:TAHO; TSX, SWX:THO) is taking. Tahoe recently acquired cheap mining projects in Canada and Latin America; although this obviously involves an initial outlaw of funds (e.g. $750 million for Lake Shore Gold Corp), it brings down the company's average cost per mine. As in all the cases above, trimming costs has as much to do with planning for the future as it does with saving money in the present.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.