After a long and painful run for gold miners since 2011, the prospects for the mining sector may finally be improving.
While mining stocks have lagged behind the performance of bullion prices and gold derivatives, even as these investments tied to gold have been mired in a bear market of their own, the drop in prices forced these companies to increase the efficiency and cost-effectiveness of their mining operations in order to stay afloat. Running a profitable gold mine was much easier when spot prices were sprinting as high as $1,900/oz.
Now, even with gold prices hovering above $1,100/oz, many of the industry's biggest miners are returning to profitably after revamping their operations.
Harmony Turns Page
Harmony Gold Mining Co. (NYSE:HMY) is coming off of two consecutive quarters of losses. The company has been among the hardest hit in the sector, seeing its stock price tumble 38% so far this year. Luckily, during those 6 months of having to swallow hundreds of millions in losses, Harmony was busy investing in restructuring measures to make its mines sustainable and profitable even at the current low for commodity prices.
Before undertaking any restructuring, Harmony suffered under the highest operating costs among the largest 18 gold producers in the world. While this move toward updating its mines and its extraction process was costly for Harmony, the third-largest producer in gold-rich South Africa, it has prompted the company to issue a formal pledge to investors that all of its mines will be in profitable territory by the beginning of 2016.
Hopeful Outlook for Endeavor
Endeavor Mining (TSX:EDV; ASX:EVR) had shareholders buzzing after releasing details from the first drilling at the company's Agbaou Mine, an open-pit sit located in Côte d’Ivoire (the Ivory Coast, on the West African coast). The drilling results give strong indications that the Agbaou site contains incredibly high-grade gold ore deposits. The company's stock jumped 1.7% on both the Toronto and Australia exchanges on the news.
An extensive round of drilling revealed a number of areas with grades of at least 8 grams per tonne of ore, and some even as high at 16.5 g/t. Though this may sound like a small amount of gold, especially relative to a metric tonne of rock, most mature mines are lucky to be pulling 1 to 3 g/t after extracting the cream of the crop. Several of these high-grade deposits stretch between 5 m and 10 m into the ground, providing hope that wide stretches of this high-grade gold may lay within the ore.
Producers' Hedge Remains Subdued
Another interesting bit of news from the mining sector is the surprisingly dormant amount of hedging being undertaken by gold producers. This is done to ensure that a gold miner can guarantee selling their output at a certain price, even if metal prices fall in the time between operations begin and the gold is finally ready to sell.
Many mining companies established aggressive hedges in the last decade, back when gold was trading in the $300-$400 per ounce range. In doing so, they missed out on the massive price swing upward that saw the metal more than quadruple in price because they had taken out hedge contracts to sell their gold at those current levels.
It seems the industry is taking a more conservative approach to hedging this time around: net hedging among gold producers actually dropped slightly, by $5 million. This could indicate either the unwillingness of producers to miss out gains in the gold price or their conviction that prices aren't going any lower, or a combination of both.