LONDON — Gold’s steepest quarterly drop in at least 90 years will create stronger producers that shun expensive new mines and return more to their shareholders, fund manager Craton Capital said on Friday.
"It’s a very healthy cleansing exercise and the result will be a much better industry," said Markus Bachmann, manager of the Craton Capital Precious Metal Fund.
The Philadelphia Stock Exchange Gold and Silver index of 30 companies operating from Canada to Tanzania tumbled 46% in the first six months of the year, and is heading for the third successive annual decline. The precious metal lost 23% in the second quarter, reaching a 34-month low of $1,180.50/oz on June 28. Some companies may not survive the slump, Mr Bachmann said.
"There will be casualties, make no mistake," he said. "But overall, it’s a good thing. We all wished it wouldn’t have been so painful."
Gold producers’ stocks have lagged behind gains in the precious metal for the past six years as money-losing takeovers and budget blowouts sapped returns.
Gold-mining firms spent $195bn on acquisitions during a decade-long price boom.
"There’s an absolutely urgent need for a complete restructuring of the industry and it’s going to happen," Mr Bachmann said. "We are at the end of the growth cycle. This is going to be a cycle of implementation and free cash-flow generation."
BlackRock’s Evy Hambro, who manages the $10bn World Mining Fund, said last week that the collapse in prices would benefit shareholders over time. "The fact that the gold price has fallen is actually going to be very healthy to kind of reset the bar for the gold-equity space and force the changes that are needed.
"We need to see these costs taken out of the industry; we need to see the companies stop producing the ounces that don’t make money and focusing on the ones that do."
Bullion’s tumble has put pressure on gold miners already battling surging expenses. The average cash cost to mine each ounce of gold for the biggest producers rose 7.1% to $771 in the first quarter compared with the previous three months, and has more than doubled from the same period in 2007, according to data compiled by Bloomberg.
Gold producers might be able to cut expenditure by about 10% this year by taking out "easy costs", and some may reduce expenses by 15% to 20% in the next two years by closing down marginal mines or reducing the size of some operations, Mr Bachmann said. "There will be companies that will take leadership and will be able to reduce costs," he said.