Two of the world's leading gold miners reported big drops in quarterly earnings on Wednesday as soaring costs for fuel and raw materials ate into margins already narrowed by a slumping gold price.
Denver-based Newmont Mining Corp (NEM.N: Quote, Profile, Research, Stock Buzz), the world's second-largest gold producer, posted a steeper-than-expected 51 percent drop in third-quarter profit, due to decreased sales volumes and higher production costs.
South Africa's Gold Fields (GFIJ.J: Quote, Profile, Research, Stock Buzz), the world No. 4, posted an 86 percent fall in adjusted earnings in the September quarter, also because of lower production blamed on safety repairs and higher costs.
Gold and other mining companies have felt the effects of the recent financial market turmoil and fears of a global recession, prompting them to reconsider some capital projects and exploration.
Last week, the price of gold, traditionally a safe haven in times of economic uncertainty, fell below $700 per ounce for the first time in more than a year. It was selling for about $770 in New York on Wednesday.
"This is a problem because the smaller guys have lower costs, but the really big ounces come from gigantic open pits that are energy-intensive," said Jay Taylor, who publishes an industry newsletter, Gold, Energy & Tech Stocks.
"You're looking at a period when oil was peaking, but with an increase in the price of gold, I expect an improvement going into the fourth quarter."
"The issue for gold companies is that they are acting like ordinary equities, rather than gold stocks, and are caught up in the tidal wave of buying and selling," said Jeffrey Nichols, managing director of American Precious Metals Advisors.
"In the near-term it will continue, but if gold moves higher, which I expect in the next six months, gold shares should perform better.
"Those with higher costs will probably outperform the lower-cost producers because of the leverage they have with the gold price," said Nichols.
Newmont said its average production cost per ounce of gold rose to $480 in the third quarter, from $374 a year earlier, while the average price it received for its gold rose to $865 per ounce, from $681 a year earlier.
Gold Fields said total cash costs rose 22 percent to $617 per ounce on wage increases in South Africa and higher power tariffs in both South Africa and Ghana, and global inflation.
Newmont has blamed cost pressures for constraining development of its Boddington project in Australia, which is 85 percent completed and expected to start up in early- to mid-2009.
Also on Wednesday, Chief Executive Officer Richard O'Brien told Wall Street analysts that projects in Conga, Peru; Hope Bay, Canada; and Akyem, Ghana, are under review "until we understand the impact of the global financial crisis."
Newmont sold less gold -- 1.28 million equity ounces after 1.33 million a year earlier -- but still expects 2008 annual equity gold sales of between 5.1 million and 5.4 million ounces, with costs applicable to sales of between $425 and $450 per ounce.
Gold Fields, Africa's second-largest gold producer, said production fell by 8 percent to 798,000 ounces in the quarter as shutdowns for repairs in key mines and problems in starting its new Cerro Corona mine in Peru weighed. Lower output from Ghana and Australia also depressed production.
But it forecast output would rise 5 percent to 840,000 ounces in the December quarter and an annualized 4 million attributable ounces in the March quarter from 3.64 million.
"Gold Fields has disappointed for some time on production. The market wants to hear good news, which we haven't seen for a while," said Stephen Roelofse at Metropolitan Asset Managers.
Newmont's shares, which were trading at a 52-week high of $57.55 on January 15, were up 2 percent at $27.00 on the New York Stock Exchange on Wednesday afternoon, off an earlier low at $25.46. Gold Fields' shares closed 16 percent higher in Johannesburg, where the gold sector index ended up 9.6 percent.