By Thomas Biesheuvel
Tuesday, December 11, 2012
Gold-mine investors are losing patience with
management in the $60 billion industry as their shares head for the first
back-to-back annual slump since 1998, even as the metal completes a dozen
years of gains.
Producers from Canada's Barrick
Gold Corp., the world's biggest, to Newmont Mining
Corp. of the United States are failing to control expenses. The average cost
to extract an ounce of gold by the largest miners jumped 23 percent to
$584.70 in 2011, data compiled by Bloomberg show. In contrast, silver
production costs fell 12 percent to the lowest since 2007, the data show.
Money managers including billionaire investor George
Soros reacted by boosting stakes in physical gold, pushing gold-mine
executives to resign, or shifting into silver. Direct holdings of the metal
reached a record 2,629.3 metric tons Dec. 10, valued at $145 billion, after
more than tripling in five years, data compiled by Bloomberg show.
"Investors are very critical, voting with their
feet and pushing management teams to resign," said John Wong, a
portfolio manager at CQS Group's New City Investment Managers, who increased
his silver holdings. "You can tell from the way investors sold Barrick down that they are on short fuses."
Barrick replaced Chief Executive Officer Aaron
Regent with Chief Financial Officer Jamie Sokalsky
on June 6, saying it was "disappointed" in the share performance
after costs rose and production dropped. Since then the stock lost another 19
percent as the company missed earnings for four straight quarters amid delays
and cost overruns at its Pascua-Lama project on the mountainous
At least five more gold CEOs lost their jobs this
Silver producers comprise three of the five biggest
holdings in Wong's $94 million Golden Prospect Precious Metals Ltd., led by
Silver Wheaton Corp. In 2010 four of the funds' five largest holdings were
The NYSE Arca Gold BUGS
(HUI) Index of gold mining companies has declined 24 percent in the past two
years compared with a 4.4 percent gain in the MSCI World Index. The
performance is a result of an "appalling track record of value
destruction" by management teams, according to Evy
Hambro, manager of BlackRock's
$12 billion World Mining Fund.
biggest holding is Rio Tinto Group, which produces gold only as a byproduct
from copper mining.
Gold producers make up six of the eight worst
performers in the S&P Global Resources index this year, with IAMGOLD
Corp., Harmony Gold Mining Co. Ltd., and AngloGold Ashanti Ltd. posting the
The Arca benchmark gold
index fell about 12 percent this year compared with a 9 percent gain in
gold's price. The Bloomberg World Mining Index is little changed, while key
materials such as iron ore and thermal coal dropped 11 percent and 16 percent
respectively. Copper has gained 6.7 percent.
Gold companies also face competition from
gold-backed exchange-traded products, or ETPs, as investors bet on bullion
without the operational risks from mining.
Billionaire Soros boosted his stake in
exchange-traded products backed by gold in the third quarter. Soros Fund
Management increased its investment in the SPDR Gold Trust, the biggest fund
focused on the metal, by 49 percent to 1.32 million shares as of Sept. 30
from three months earlier, a U.S. Securities and Exchange Commission filing
"We are at a watershed where the message from
shareholders is very loud and clear: 'We do not like what you do,'" said
Markus Bachmann, Johannesburg-based manager of the Craton
Capital Precious Metal Fund. "The costs are too high. The returns are
not good enough."
To be sure, producers with good management and
operations may be set to benefit from slowing cost inflation and rising gold
prices, investors say. Gold may advance to $1,850 an ounce next year,
according to the median forecast of 24 analysts, while cost inflation of 19
percent in the past 12 months may ease as the mining industry curtails
expansion in response to faltering Chinese demand.
"There are signs that the cost inflation is
contained, which will help the companies," said Bachmann. "By and
large we will see a healthier industry next year."