Canadian miners will report another set of lousy results for the third quarter, but there may be some light among the wreckage as companies take drastic steps to slash costs to stay alive in a lower commodity-price world.
For more than a year, miners have been in turmoil, trying to operate amid the downturn in metal prices. The country's three largest gold companies, Barrick Gold Corp., Kinross Gold Corp. and Goldcorp Inc., have recorded billions of dollars in writedowns. Other producers have stopped developing projects and cut jobs and dividends.
The bad news is not expected to stop when companies start reporting their quarterly results this week. Potash Corp. of Saskatchewan Inc. warned it will earn less because its customers are waiting for the price of the fertilizer to drop further before making their purchases. Other miners, including the world's biggest gold producer, Barrick, could write down more assets as they try to mitigate the drop in metal prices and high cost of fuel, analysts say.
And if metal prices do not lift during the final quarter of the year, miners will be forced to write off some of their reserves because it will be too expensive to dig resources out of the ground.
But there is a glimmer of hope that the severe cost-cutting measures will soon begin to help companies' bottom lines and that, in turn, will help boost their depressed shares.
"There has been a focus, like you would not believe, on cost cutting that will start to show through," said John Gravelle, global and Canadian mining leader with PricewaterhouseCoopers LLC. "I think we will see some of the effects by the end of the year."
The price of gold is trading at around $1,310 (U.S.) an ounce, down 30 per cent from the record high of more than $1,900 per ounce reached in August, 2011.
A number of factors, including uncertainty about the strength of China's economy and the U.S. Federal Reserve's decision to start winding down its economic stimulus program, will likely drive down the price of gold further as investors sell the precious metal in favour of a stronger U.S. dollar.
That means it is critical for miners to be able to produce gold for far less than $1,300 an ounce.
Analysts with RBC Dominion Securities said Barrick, Kinross and Goldcorp's efforts to reduce expenses will help cut their total cost of production as well as help them weather the weaker gold price.
Also known as the "all-in sustaining costs," Barrick is now expecting to spend on average between $900 and $975 to produce an ounce of gold this year. Kinross is expecting all-in-costs between $1,100 and $1,200 per ounce sold and Goldcorp is predicting an average of between $1,000 and $1,100 per ounce.
Companies that primarily produce non-precious minerals, such as Teck Resources Ltd., are also expected to report weaker results because of lower commodity prices. But the swoon in metal prices may be nearing the end.
"We are near the bottom, but not quite there yet," said Patricia Mohr, vice-president and commodity market specialist with Scotiabank, referring to non-precious metal prices. "There is some tremendous value in terms of stock prices for investors. But you have to be willing to hold for several years. I think early next year is a good time to get in," she said.
The newly disciplined companies, which overpaid for acquisitions when metal prices were soaring, have lost between a third to a half of their share value since the beginning of the year.