Gold's rapid drop threatens to weed out the weaker players, pressuring high-cost producers and setting the stage for mines to be shuttered.
"If the price stays below $1,200 for any appreciable length of time, then you will see mine closures or at least mines shrunk down considerably," Goldcorp Inc.'s chief executive Chuck Jeannes said in an interview.
The precious metal lost about $100 (U.S.) an ounce over the past two weeks due to monetary-policy decisions in the United States and Japan that sent the U.S. dollar soaring. Gold sank as low as $1,137.40 an ounce before recovering to $1,178.50 on Friday.
Miners that spend more than $1,100 to produce an ounce of gold are feeling the pinch.
Iamgold Corp. is racing to slash expenses. The Toronto-based company, with mines in Canada, South America and West Africa, spent nearly $1,200 to produce an ounce of gold in the first quarter. That was whittled down to $1,136 in the following quarter.
"If the gold price drops below $1,100 per ounce, the company will have difficulty generating free cash flow," said Chris Mancini, an analyst with the Gabelli Gold Fund.
Iamgold says it is taking steps to cushion the blow. The company said it could use some of the proceeds from a recent asset sale to buy lower cost mines and reduce expenses.
"It is an opportunity for us to bring in better-performing assets that have lower costs and be able to be more selective on what mines we run," Iamgold's chief executive Steve Letwin said in an interview.
"We are going to be aggressively cutting. We are going to get down below $1,100 an ounce, for sure." Similarly, Kinross Gold Corp. says it has options to protect itself and is not afraid to make more tough decisions. The company said it would not expand its Tasiast gold mine in Mauritania if lower gold prices persist. Tasiast, which has suffered multiple writedowns, is more expensive to operate than the rest of Kinross' mines.
Canadian companies are in a better position than their South African rivals. Harmony Gold Mining Co. Ltd. spent $1,245 to produce an ounce, while DRDGold Ltd. spent $1,237 per ounce, according to their latest quarterly reports.
Kinross and the world's biggest gold producer, Barrick Gold Corp., have undertaken some of the most severe cost-cutting measures in the industry to improve their balance sheets. They have cut their dividends, recorded huge writedowns, suspended expensive operations and sold assets to shore up their cash position.
"We are watching our balance sheet like a hawk," Kinross chief executive Paul Rollinson said in an interview.
Mr. Rollinson said that the slump in oil prices and a weaker currency in Russia, where a third of Kinross' production is based, has helped. "One thing doesn't move in isolation. The ruble has dramatically impacted our Russian cost structure," he said.
After two years of tumult, Barrick has emerged as the lowest-cost senior producer. Along with Eldorado Gold Corp. and Goldcorp, it has some of the lowest expenses in the industry, producing gold at $834 an ounce.
The drop in gold has also exposed miners to new threats from credit rating agencies. S&P warned early in November that if gold settled below $1,200 that companies including Barrick, Newmont Mining Corp. and Allied Nevada Gold were vulnerable to downgrades.
Barrick has said it is focused on lowering its net debt to $7-billion from $10-billion. A company spokesman said Barrick "continues to have a driving focus on further improving performance and finding cost efficiencies across our portfolio."
Gold miners have seen their market value plunge as bullion has lost about 40 per cent since its record high in the fall of 2011. Barrick shares, which crossed $54 then, now trade at $13.79. Kinross shares, which were then at $16, now trade at $2.84. Goldcorp touched $54.91 and is now worth $22.68.
In the United States, Allied Nevada Gold hit $43.71 (U.S.) a share then and is now at $1.05. Newmont reached $70.49 then and trades at $19.19 now.