The recent round of gold mining profits (and losses) reporting for various periods to 30 June 2009 has shown up a global mining subsector barely scraping a living out of the dirt unearthed at countless locations across the world. Like hamsters on a treadmill, gold miners continue to chase the illusion of profits, backed by a commodity that draws more support than the search for intelligent life in outer space.
The conundrum faced by gold miners and, more tellingly, by investors with a gold bent, who like rabbits in a spotlight, continue to blindly invest in listed gold stocks, is adequately examinable at Barrick, the world's biggest gold digger by production and market value. According to its own advertisements, courtesy of its 2008 annual report, Barrick stands as "the gold industry's only ‘A' rated balance sheet" It also lays claim to "the largest production, reserves and market capitalization".
All this is no doubt true, but also true is that Barrick increasingly scrapes closer to the bottom of barrels, just to stand still. What this says about lesser gold diggers could be illuminating. The key to unlocking a looming potential crisis faced by gold miners is conveniently published cash flow statements: Barrick's show that the world's leading gold miner earned US$2.2bn in operating cash flows during its 2008 financial year. The first wobbly leg is that gold companies are miners, and miners always face material capital expenditure bills; Barrick's total for 2008 was US$1.8bn.
Like most gold miners, Barrick faces dwindling production at existing mines and remains under constant pressure to find or buy, or develop, unmined gold ounces. On this note, Barrick's acquisitions cost US$2.2bn - in cash - during 2008 alone. Barrick's operating cash flows for 2008, less capital expenditure, and less acquisitions, produce a deficit. This was financed by Barrick from existing cash reserves, and new net debt raised, during 2008, of US$1.1bn.
As some kind of a yardstick, BHP Billiton, the world's biggest diversified resources stock, this week posted annual results for its financial year to 30 June 2009, for which operating cash flows are reflected as US$25.2bn. Cash capital expenditure was US$9.5bn, and US$1.2bn was spent on exploration, leaving billions of dollars in free cash flow from the year's activities.
Back in the gold pits, challenges posed by bullion prices continue to mount. For nearly six months now, gold companies everywhere have been facing the year-on-year effects of a dollar gold price that's been churning between roughly US$700 and US$1,000 an ounce since March 2008. While prices have traded around the upper end of that range for most of 2009, and energy prices and other costs have fallen from record levels seen around mid-2008, gold companies are struggling to make profits. This hardly reflects favourably on a mining subsector that has benefited from a commodity that fell less, and has been more stable relatively, than any other.
