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Zacks Industry Outlook Highlights: Barrick Gold, Harmony Gold Mining, Newmont Mining, Kinross Gold and Goldcorp

CHICAGO, Feb. 12, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Gold, including Barrick Gold Corporation (NYSE:ABX-Free Report), Harmony Gold Mining Company Limited (NYSE:HMY-Free Report), Newmont Mining Corporation (NYSE:NEM-Free Report), Kinross Gold Corporation (NYSE:KGC-Free Report) and Goldcorp Inc. (NYSE:GG-Free Report).

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Industry: Gold

Link: http://www.zacks.com/commentary/31271/gold-stock-update--outlook---feb-2014

As per the latest published data from the World Gold Council, total gold demand in the first three quarters of 2013 declined 12% to 4,373 tons, as substantial net outflow from gold ETFs offset demand for jewelry, bars and coins. Jewelry demand soared 20% and demand for gold bars and coins also went up 36% year over year, mainly driven by China and India. Jewelry demand in the U.S. has been strong over the first three quarters of 2013 after a gap of eight years, fueled by positive signs of a recovery and lower prices.

Central banks remained the primary purchasers of gold, albeit at a slower rate, purchasing net 297 tons in the period, accounting for around 9% of total gold demand. On the contrary, the first three quarters of 2013 witnessed a 697 tons net outflow from gold ETFs. The major impact was felt in the second quarter with a record outflow of 402 tons as gold prices fell sharply.

The difference between investors at the retail and the investment level was never so apparent. Retail investors (in gold bars and coins) view gold for preserving wealth and hedging against inflation over the long term. Thus, in 2013, demand from retail investors leaped to unprecedented levels as they saw an opportunity to add to their holdings as gold prices dipped.

On the other hand, the institutional investors have a short-term, speculative approach. Expectations of the U.S. government tapering quantitative easing led to ETF investors losing confidence in gold as a safe haven. The price drop prompted opportunistic investors to sell their ETF holdings and shift to other investment options. During the year, the U.S. stock market was on fire and investors flocked to equities shunning gold.

Supply

Mine production in the first three quarters was at 2,188 tons, up 3% year over year. This is a marked improvement, as production in 2012 was restrained by labor disruptions, operational issues, delayed project start-ups and expansions. China topped the list followed by Dominican Republic, Brazil, Canada and Australia.

Recycling of gold contributed 1,047 tons to the total supply, 13% lower year over year. The drop in gold prices led to a decline in recycling activity as consumers are less inclined to part with their stocks at lower prices. Recycling activity has declined in the past six consecutive quarters. Overall, gold supply dipped 4% to 3,196 tons in the first three quarters of 2013, dragged down by lower recycling activity.

Survival Tactics

The gold companies are yet to announce their fourth quarter results. As we delve into the September-end quarterly numbers of the gold companies in our coverage -- Barrick Gold Corporation (NYSE:ABX-Free Report), Harmony Gold Mining Company Limited (NYSE:HMY-Free Report), Newmont Mining Corporation (NYSE:NEM-Free Report), Kinross Gold Corporation (NYSE:KGC-Free Report) and Goldcorp Inc. (NYSE:GG-Free Report) -- we see earnings have taken a beating across the board due to the decline in average realized gold prices.

The price decline added to the woes of the industry that was already grappling with rising costs, labor issues, strikes, delays and/or the cancellation of projects. If prices fall further, margins will be constrained as the price of gold closes in on the cost per ounce of the companies.

The gold miners have decided to suspend projects, curtail their capital spending and resort to layoffs to conserve cash. The companies are actively pursuing opportunities to optimize their portfolio, including the divestiture of certain non-core or non-productive assets.

Following the sale of its oil and gas unit, Barrick Energy, and three Australian mines last year, Barrick Gold announced its plans to divest the Plutonic mine and Kanowna gold mine in Western Australia over the past two months. Likewise, Newmont has entered into a deal to sell its Midas underground operation and mill complex in Nevada.

In Feb 2014, Goldcorp along with its joint venture partner Barrick Gold announced that they will sell their respective stakes in Marigold mine in Nevada. Barrick and Newmont have resorted to dividend cuts while Kinross and Harmony Gold have suspended their dividend payouts.

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