Growing pains at gold mines and the threat of a Fed rate hike have jointly cast a pall over producers.
Skittish investors have grown sensitive to any hint of problems in the gold sector after four years of falling metal prices and disappointing share performance.
They demonstrated their anxiety on Thursday by chopping 10 per cent off Goldcorp Inc.'s share price after the company reported a surprise loss for the quarter, largely as a result of inventory adjustments and other non-cash items.
Analysts said the fall in Goldcorp's share price was also related to teething problems at a number of its operations. At its new Éléonore mine in Quebec, for instance, folds and cracks in the rock are resulting in lower-than-expected ore grades being mined. In addition, the company is facing labour issues at its Cerro Negro mine in Argentina and is having to rethink how it approaches the Cochenour ore deposit in Ontario after exploratory drilling revealed a different shape from what had been expected.
The problems seem temporary, but they underscore the concerns surrounding the sector, especially at a time when the U.S. Federal Reserve appears poised to raise interest rates. Higher rates could make gold less attractive by boosting the return from other stores of wealth.
Despite the pall cast by the Fed, there is a lot to like in this week's batch of quarterly results from a trio of major Canadian gold miners. Goldcorp, Barrick Gold Corp. and Agnico Eagle Mines Ltd. each reported strong output, falling debt and cheaper production costs.
The problem is that all the good news adds up to a short-term challenge for an industry grappling with low gold prices. So long as major producers can still churn out free cash flow in a world of flat prices, there is little pressure for them to throttle back on gold output and ease the global glut.
Goldcorp, the world's largest gold miner by market value, has long maintained that the industry is suffering from "peak gold," the result of all the projects that were started in happier times finally hitting production and flooding the market. It expects the global output of gold to hit a high point this year, then slide over the coming half-decade as existing mines are depleted.
If that does happen, gold's long swoon might finally come to a close. The metal is trading below $1,150 (U.S.) an ounce, 40 per cent below its 2011 peak. "We believe we are getting near the end of the gold bear market," Chuck Jeannes, president and CEO of Goldcorp, told analysts in a conference call Thursday.
So far, though, output is still expanding at many companies. Goldcorp said its gold production jumped to a record 922,000 ounces in the quarter compared with 651,700 ounces a year earlier, largely as a result of its Cerro Negro and Éléonore mines achieving commercial production.
Agnico Eagle's gold production also hit record levels, jumping 26 per cent from the same period a year earlier. Even Barrick, a company that has been trying to downsize, reported that its gold production for the quarter had inched up from the same period in 2014.
Sid Subramani, an analyst at the independent investment researcher Veritas, said Goldcorp shares were vulnerable to a decline because they were expensive in relation to other gold miners and the company isn't generating enough free cash flow at current prices to justify its valuation.
To be sure, all three miners have reduced their all-in sustaining costs (AISC), a broad measure of how much they have to spend to produce gold. Barrick, for instance, said its AISC would be $830 to $870 an ounce in 2015, far below the $1,014 level of three years ago.
In addition, Barrick said it was on track to reduce its $13.1-billion debt by $3-billion this year. Agnico Eagle and Goldcorp, too, reported significant debt repayments.
Mr. Subramani said he was impressed by the progress that Barrick made during the quarter in reducing its debt and cost structure. He also regards Agnico Eagle as a strong operator and is closely following the progress of its Amaruq project in Nunavut. "That's probably the [company's] biggest catalyst going forward and things do look positive at the moment," he said.
Ian McGugan