After updating their precious metals’ company cost curve, Citi’s ominous warning that, “a combination of rising unit costs (15% yoy), sustained high capital budgets and a falling gold price have resulted in a fast contraction in margins – so much that no gold company under our coverage will generate Free Cash Flow at spot gold.”
Companies are trying to adjust by cutting capex, exploration and corporate costs. But we also notice that most of the global gold cost curve is burning cash at spot levels. Further cuts are needed in the coming 12 months to make ends meet.
We view this as a return to normal for global gold equities. Given the ‘price taker’ nature of the industry, the next decade will see high-cost asset disposals, reduced capital budgets, lower exploration expenditure and balance sheet recapitalisation as companies try to survive in a lower gold price environment…
…as China seems to be showing the world, we will see supply reductions occurring at the same time as the rolling over of ‘peak suppression’ of the gold price and the precious metal will realize its real fiat-numeraire-based value.