Gold miners come clean on costs after lost 6 years

Ballooning Budget

Barrick’s gross margin, expressed as a proportion of sales, was 47 percent in 2012, while its operating margin was 39 percent, according to data compiled by Bloomberg.

“The costs of running this business are higher than it looks and that’s how we need to manage this business going forward,” Barrick CEO Jamie Sokalsky said at a Jan. 29 conference in Toronto.

Sokalsky has been expounding his strategy since taking charge in June, when Barrick fired his predecessor Aaron Regent, citing a disappointing share-price performance. The Toronto- based company saw the cost estimate for its Pascua-Lama mine balloon to as much as $8.5 billion in 2012, from as much as $3.6 billion in 2011.

Fired CEOs

Regent was among at least six CEOs of North American gold producers to either announce their departure or be fired in the past year. Kinross, which fired Rollinson’s predecessor Tye Burt in August, has taken more than $5.5 billion of writedowns on Mauritanian assets the Canadian company acquired as part of its C$8 billion ($7.8 billion) takeover of Red Back Mining Inc. in 2010.

As gold miners pursued additional ounces at the expense of profit margins, investors instead plowed billions of dollars into gold-backed exchange traded funds. The weight of gold behind those ETFs, which include the $64.9 billion SPDR Gold Trust, has quadrupled to 2,530 tons since the start of 2007, according to data compiled by Bloomberg.

The boom in ETFs may now be at an end, with physical holdings poised for the biggest monthly decline since 2008. The gold cycle has probably turned as the recovery in the U.S. economy gathers momentum and investment holdings shrink, Goldman Sachs Group Inc. said in a Feb. 25 report. Still, it’s not yet clear whether gold miners will benefit from the change in sentiment.

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