The trend increase in income from 2010 that continued until 2011, became the savior for gold miners, but did not deny the increase in capital and operational costs have eroded some incoming cash flow, which is reflected in the quarterly report the latest bout of eight major gold producer.
So who wants to commandeer a major gold miner, or any gold miner, for that matter? Relative to the persistent gains in the dollar gold price over the past near-decade, listed major gold stocks experienced three relatively tight years from 2007 to 2009, from a free cash flow viewpoint: above all else, costs started to bite.
But rising revenues came to the rescue, again, and 2010 was an excellent year, a trend which has largely continued into 2011, as reflected in the latest bout of quarterly reports from eight of the major gold producers.
One conclusion to be drawn from the apparent fault lines is that while dollar gold bullion has been highly supportive for close on a decade, costs have indeed been increasing at a compound rate. Rising costs continue to erode operating cash flows, and also raise capital costs, whether at existing mines, or for new builds (where prior budgets are being persistently ratcheted upwards).
If there is concern over the trends of gold majors seen in free cash flow generation, few would be likely to omit discussing Barrick's recent bid for Equinox, a copper miner. Freeport-McMoRan, which can be regarded as a gold major, given that Grasberg ranks as the world's biggest gold mine, generates the majority of its cash flow from copper. It is also No 1 in molybdenum and cobalt, a minor metal.
Seen as a composite, Freeport-McMoRan generates astonishing amounts of cash, not only among miners of all kinds, but more so when compared to gold-focused miners. On this point, few major gold stocks are "pure"; Barrick and Newmont, among others, already produce material amounts of copper. In the first quarter of 2011, nearly a third of Goldcorp's turnover was from metals other than gold. And so on.
FREE CASH FLOWS,
USD m | | | | | |
| TOTAL* | 1Q11 | 1Q10 | 2010 | 2009 | 2008 | 2007 |
| Operating cash flow | 6,139 | 4,433 | 18,345 | 13,146 | 9,003 | 10,084 |
| Capital expenditure | -2,885 | -1,960 | -9,285 | -9,129 | -10,355 | -7,158 |
| Free cash flow | 3,254 | 2,472 | 9,061 | 4,017 | -1,352 | 2,925 |
| | | | | | |
| EXCLUDING FREEPORT MCMORAN | | | | |
| Operating cash flow | 3,780 | 2,615 | 12,108 | 8,749 | 5,633 | 3,859 |
| Capital expenditure | -2,380 | -1,731 | -7,873 | -7,542 | -7,647 | -5,403 |
| Free cash flow | 1,400 | 883 | 4,236 | 1,207 | -2,014 | -1,545 |
| * For eight gold majors |
While free cash flow analysis suggests that gold majors have more than a few issues to ponder, the escalating cost of capital expenditure is really rearing its head. Net debt (including cash) for the gold majors peaked at the end of 2008, and has been falling nicely since. Net debt for the eight gold majors was around USD 750m on 31 March 2011, and USD 1.3bn if Freeport-McMoRan is excluded.
This raises the issue of new, specifically additional or non-replacement, production, given the incessant demand for listed gold stocks to grow. The world's biggest gold projects are very big indeed, relative to the financing required. The budget at Cerro Casale (Barrick 75%, Kinross 25%) is USD 5.2bn; at Donlin Creek (Barrick 50%, New Gold, 50%) USD 4.5bn; at Pascua Lama (Barrick) USD 3.5bn; at Pueblo Viejo (Barrick 60%, Goldcorp 40%) 3.4bn, and at Tasiast (Kinross) USD 2.7bn.
While not all projects ready for build have progressed to that stage, the outlook may now be characterised more by headwinds. Barrick, for one, has this year announced sharp increases in estimated capital outlays for some of its biggest projects. Seen broadly across the global sector, there are signs of projects being delayed; some may even be put into mothballs.
| NET DEBT ANALYSIS | | | | | |
| TOTAL* | 1Q11 | 1Q10 | 2010 | 2009 | 2008 | 2007 |
| Cash | 16,579 | 11,868 | 14,347 | 10,386 | 3,975 | 6,789 |
| Debt | -17,329 | -18,452 | -18,515 | -20,301 | -17,468 | -16,114 |
| Net debt | -750 | -6,584 | -4,168 | -9,916 | -13,493 | -9,325 |
| | | | | | |
| EXCLUDING FREEPORT MCMORAN | | | | |
| Cash | 12,489 | 8,826 | 10,609 | 7,730 | 3,103 | 5,163 |
| Debt | -13,745 | -13,667 | -13,760 | -13,955 | -10,117 | -8,903 |
| Net debt | -1,256 | -4,841 | -3,151 | -6,226 | -7,014 | -3,740 |
| * For eight gold majors |
Current trendlines suggest that gold companies may well again be more extensively examining taps available for external funding, viz., increased debt and, of course, rights issues. For the generalist investor, if this is indeed the case, it could be surprising, given years of headlines that have emphasised the multi year bull market in dollar gold bullion. Among the broad materials market, price trends for gold have been very well accompanied by other commodities. After all, gold mines must be run on more than just positive sentiment.
| FREE CASH FLOWS, USD m | | | | | |
| 1Q11 | 1Q10 | 2010 | 2009 | 2008 | 2007 |
| Operating cash flow | 1,435 | 1,130 | 4,783 | 2,899 | 2,254 | 1,732 |
| Capital expenditure | -1,071 | -709 | -3,323 | -2,358 | -1,776 | -1,046 |
| Free cash flow | 364 | 421 | 1,460 | 541 | 478 | 686 |
| | | | | |
| Operating cash flow | 586 | 282 | 1,787 | 1,270 | 866 | 651 |
| Capital expenditure | -352 | -298 | -1,228 | -1,349 | -1,372 | -871 |
| Free cash flow | 234 | -16 | 559 | -78 | -506 | -220 |
| | | | | |
| Operating cash flow | 989 | 715 | 3,167 | 2,947 | 1,293 | 663 |
| Capital expenditure | -402 | -309 | -1,402 | -1,769 | -1,870 | -1,672 |
| Free cash flow | 587 | 406 | 1,765 | 1,178 | -577 | -1,009 |
| | | | | |
| Operating cash flow | 35 | 43 | 306 | 204 | 421 | -17 |
| Capital expenditure | -98 | -131 | -262 | -429 | -509 | -457 |
| Free cash flow | -63 | -88 | 44 | -225 | -88 | -474 |
| | | | | |
| Operating cash flow | 171 | 74 | 483 | 115 | 118 | 246 |
| Capital expenditure | -97 | -113 | -512 | -657 | -909 | -524 |
| Free cash flow | 74 | -38 | -28 | -542 | -791 | -278 |
| | | | | |
| Operating cash flow | 335 | 229 | 968 | 786 | 444 | 341 |
| Capital expenditure | -256 | -94 | -564 | -481 | -715 | -601 |
| Free cash flow | 79 | 135 | 405 | 304 | -271 | -260 |
| | | | | |
| Operating cash flow | 229 | 141 | 613 | 528 | 237 | 243 |
| Capital expenditure | -105 | -78 | -582 | -499 | -497 | -233 |
| Free cash flow | 124 | 64 | 31 | 29 | -259 | 10 |
| Freeport-McMoRan | | | | | | |
| Operating cash flow | 2,359 | 1,818 | 6,237 | 4,397 | 3,370 | 6,225 |
| Capital expenditure | -505 | -229 | -1,412 | -1,587 | -2,708 | -1,755 |
| Free cash flow | 1,854 | 1,589 | 4,825 | 2,810 | 662 | 4,470 |
Source
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