Gold miners crippled by costs risk losing out on bullion’s boom

Analysts had high hopes for the industry. Gold has surged more than 30% this year, while fuel prices — one of the miners’ key expenses — have been easing. But Newmont’s results revealed that big gold producers are still wrestling with inflationary pressures, especially regarding labor costs, that have lasted longer than expected.

“There’s a potential read-through here, assuming Newmont’s takeaways are accurate, that this is a risk factor for the industry,” said Josh Wolfson, a mining analyst with Royal Bank of Canada.

Newmont earned 80 cents a share, well short of the average estimate of 89 cents among analysts surveyed by Bloomberg. Revenue of $4.61 billion also trailed estimates, as did its gross profit margin, which slipped below 50%.

The company said it spent more to dig up the precious metal at its mines in Australia, Canada, Peru and Papua New Guinea than in the previous quarter. Capital expenses rose 10% due to expansion projects in Australia and Argentina, while some of the company’s highest expenses came from major assets it picked up through last year’s $15 billion takeover of Newcrest Mining Ltd.

Some of those cost issues are specific to the company, and not necessarily indicative of a broader industry trend. Newmont is undertaking costly maintenance work at its Lihir mine in Papua New Guinea — a notoriously complex operation in a remote region — and it spent more to restart its Cerro Negro mine in Argentina after operations were paused due to the deaths of two workers in April.

But the company’s growing costs for workers could signal trouble across the industry.

“It’s the labor costs where we’re seeing that escalation,” chief executive officer Tom Palmer told analysts in a conference call Thursday.

“Whether that be maintenance shutdowns, maintenance that you use to supplement your workforce, costs of running camps, costs of flying people to and from the camps — that’s where we’re seeing some escalation beyond what we’d assumed at the start of the year.”

Miners’ pitch to investors is that they can offer better returns than owning the metal, partly due to greater investment options and shareholder payouts, but the industry has often underperformed over the past 15 years as major expansions left producers with big debts and angry shareholders.

Newmont’s earnings also serve as a preview for Canada’s Barrick, which shares a giant mining complex with Newmont in Nevada. The Nevada mines produced less gold compared to the previous quarter.

Despite investor disappointment, the gold miners are still being helped by the bullion boom: Newmont posted its highest quarterly profit in five years, raking in $922 million. Analysts expect Newmont is on track to net $3.2 billion in profit this year — which would be a record for the company.

Even after this week’s plunge, Newmont’s shares are up 15% this year.

Barrick, Agnico and other big producers including AngloGold Ashanti Plc and Gold Fields Ltd. are also expected to rake in windfall returns by the end of the year.

“The street expectations were too high,” said Carey MacRury, a mining analyst at Canaccord Genuity who recommends investors buy the shares. “It was negative, no doubt, but I don’t think it’s as negative as what the market’s telling us today.”

(By Jacob Lorinc)