Stress test highlights $1,100/oz as a critical level
At $1,100/oz gold and $14.50/oz silver, the North American gold sector remains ex-growth. In addition to the cost-cutting measures that have occurred to date, producers will need to place their higher cost mines in harvest and accelerated closure mode or on care and maintenance. We would expect to see a reduction in management and board compensation and the use of private aircraft travel curtained. And below $1,100/oz, we believe some companies could see their lines of credit reduced or withdrawn, and companies with elevated levels of debt may be forced to hedge revenues, sell streams on mining assets, and/or raise distressed equity. At $1,100/oz, companies that would need to continue making cuts to discretionary and fixed costs to improve their balance sheets include AngloGold, Barrick Gold, Hochschild, IAMGOLD, Kinross, Pan American, Primero, Teranga, and Timmins.

At $1,000/oz gold and $13.25/oz silver, we would expect mine production to begin to contract as mines are placed on care and maintenance or moved into accelerated closure. In addition to the cost-cutting measures mentioned above, we believe a number of the gold producers would need to consider mergers to capture operating synergies or other financial benefits. At $1,000/oz, all of the gold/silver producers in our coverage universe would continue to make cuts to operating and discretionary costs and the most leveraged companies would seek alternative sources of equity.

At $1,200/oz gold and $15.75/oz silver, we believe most of the sector can sustain their current operating mines, but mines with AISC above $1,100/oz would likely go into “harvest mode” with significant development capital spending deferred. In addition, at $1,200/oz the producers can still implement cash-saving measures, with further cuts to G&A, exploration, and sustaining capital.

Eoin Treacy's view

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Chinese central bank buying of gold is an important source of demand and has garnered a great deal of attention in the media following last week’s announcement. However that is not the only source of Chinese demand. Domestic Chinese investors are also large consumers of gold and it is plausible that with the volatility on the stock market retail investors have stopped buying or liquidated holdings to meet margin calls. 

Gold broke downwards from the yearlong range earlier this week and while oversold in the short-term there is no evidence just yet that more than a temporary low has been found. 

Silver is still trading in the region of the November low but a sustained move above $16 would be needed to begin to suggest more than a temporary pause in this area.

Platinum remains the relative weakness leader. 

Against this background higher cost producers are coming under increasing stress. Companies with the ability to pay dividends and with low costs of production are likely to continue to outperform and may have the opportunity to pick up attractive assets at low prices in the coming months. 
The Gold BUGS Index continues to extend its downtrend and while increasingly oversold a clear upward dynamic would be required to check momentum. 

Companies such as Zijin Mining (DY 4.46%) and Sibanye Gold (DY 7.06%) which are some of the highest yielding golds miners have not been immune from the sell-off but should be among the first to rally once metal prices stabilise.