The gold mining industry is a price taker and not a price maker, and therein lies the rub as South Africa’s gold mines take a beating under the unexpectedly low gold price scenario.
Even the best manager in the world can do little if he or she is unable to influence the price received for the goods his or her company is producing, and the price turns out to be lower than the cost of production.
A business that cannot set its own prices can only go on for as long as its cash reserves will allow, or for as long as the banks are prepared to continue to fund it.
Without cash and funding, it has to reduce costs and eliminate lossmakers, until the profit position is restored.
Most South African gold mining companies are currently in the squeezed situation of making losses while facing rising costs.
Gold suffered a similar fate when its price fell to $250/oz in the late nineties – but that was still at a time when hedging was not totally out of fashion.
Today, gold companies are largely unprotected by hedging, which forces them to cut their cloth according to their means.
Some are lucky to have new projects coming in at all-in sustainable cost levels well below the current $1 300/oz price band.
But virtually all of them have unprofitable ounces somewhere down the line and these have to be cut out of the portfolio if they want to make it through the downturn.
As price takers, they are crossing fingers that they will still be in good shape to take advantage of any recovery in the gold price and, because markets and industries go through cycles, to preserve long-term optionality at reasonable cost.
As things stand, pre-emptive positions are quickly being taken in order to weather the storm.
Potential drivers of a gold-price recovery include global inflation and more quantitative easing, even if in a different form, in the US.
In the meantime, the only pro-gold-price card that gold miners can play is to eliminate unprofitable ounces in the hope that supply will fall short of demand and lift the price.
Companies with many mines are looking to dispose of mines that are marginal, even though it is not a good time to sell gold assets, and also keeping their eyes focused on balance sheets to bolster liquidity and eliminate any potential debt-maturity surprises.