The all-in cost of gold production under the World Gold Council’s new all-in cost metric is some $1 500/oz at a time of the gold price being a good $130/oz below that at the time of going to press.
Return on equity and return on capital employed of gold mining companies have been in decline for the last three years in a row to 2012 and gearing ratios have rocketed upwards as a result of troubled companies borrowing more money to keep existing operations afloat.
As Gold Fields CEO Nick Holland outlined at the Gordon Institute of Business Science (GIBS) last week, the top 40 mining companies are in serious financial trouble and operating cash flows are insufficient to cover investments.
The unprecedented drop of the HSBC Global Mining Index, made up of 183 mining companies worldwide, is a crystal clear illustration of investors deserting the mining sector and mining’s equity model being at breaking point.
A lack of money translates into an absence of mining projects, which does not augur well for the future.
New projects, many of them multibillion-dollar projects, are being delayed or cancelled the world over, and existing operations are being cut back.
Every week, there are reports of mining companies downsizing and retrenching.
“The industry is in crisis and it’s under threat,” Holland told GIBS.
Although governments the world over are wanting more taxes and royalties from mines, the revenue reports coming out of the sector show how little there is for governments to take.
Investors are in a similar boat.
From the $2-trillion worth of top 40 revenue, only 10% is left to spread around, which indicates that revenue from the first 27 working days of continuously operated mines is going towards paying the bills.
Receiving the lion’s share of the money are employees, suppliers and receivers of revenue.
Investors, who put up all the risk capital, are having to stand in the queue for what emerges in the last three working days.
That gives an insight into why investors are deserting the sector and putting their money elsewhere.
The Dow Jones Industrial Index and the FTSE 100 Index are both leaving the HSBC Global Mining Index for dead.