Plunging Gold Prices Brought on These Spending Cuts


Spending cuts abound in the mining industry. Photo Credit: Flickr/Tax Credits

Apparently, Washington isn't the only place where fiscal belt-tightening is all the rage. The mining industry has been ramping up its efforts to slash spending as well. The difference is that unlike Washington, where fingers of blame are being pointed in every direction, mining executives have just one direction to point blame: falling commodity prices.

The commodity that was hit hardest was gold, which fell a record 23% last quarter. This is causing Goldcorp to respond with a round of belt-tightening. CEO Chuck Jeannes said in the company's earnings release: "In response to lower metals prices and resulting lower-than-expected cash flow this year, we have implemented company-wide spending reductions that will help to safeguard our strong financial position while keeping intact the key elements of our industry-leading growth profile."

The company is cutting $200 million, or about 7% of its $2.8 billion capital budget for 2013. However, that's not the only place the company is cutting costs. Goldcorp is also cutting 10% of its general administrative expenses, which will save the company another $16 million. Finally, its exploration budget is getting the biggest cut as $25 million or 11% is being taken off the top of the company's previous guidance. This is all in an effort to keep its balance sheet strong after gold prices tumbled last month.

Goldcorp is not alone. Teck Resources also came out in its earnings release announcing that it was taking steps to reduce its capital spending in light of market conditions. Specifically, the company is slowing the start of the Quintette mine reopening as well as delaying the development of the Quebrada Phase 2 expansion project, which will shave about $150 million off its $2 billion capital budget. The company is forced to make these changes as the coal and copper it produces fell by 23% and 9%, respectively, in the quarter.

In addition to reducing its capital spending, the company has identified over $250 million that can be cut from its annual operating costs. It's looking to push that amount to $300 million as it seeks to find more ways to tighten its belt. That's on top of its plans to slash its exploration spending by 15%. Overall, these moves are designed to enable the company to maintain profitability and balance sheet flexibility amid slumping commodity prices.

Cost cutting really has been the theme for miners this earnings season. It was the highlight in Cliffs Natural Resources' latest release, in which the company noted that its selling, general, and administrative expenses (SG&A) were cut by 44% year over year. This enhanced Cliffs' profitability and enabled the company to produce $414 million in cash from operations during this past quarter. It's not done cutting costs just yet -- the company is looking to take another $25 million off the top. To get there, it's shaving its exploration budget by $10 million, while cutting another $15 million of its SG&A. Taken together, that's $25 million cut from the planned $315 million budget.

The company has been using the money it's saving to pay down its debt; last quarter, Cliffs was able to slash $110 million off its debt levels. It was its hefty debt levels that caused the company to undercut its historical dividend and raise equity earlier this year. However, its now using this increased balance sheet flexibility to boost its planned capex budget this year. This new plan has the company adding about $200 million to bring its capex to a billion dollars this year for two projects at its Bloom Lake Mine.

Mining companies really need to react quickly to changing commodity prices. This past quarter both coal and gold plunged 23%, which has necessitated these belt-tightening moves. Companies that don't react quickly enough to these changes could end up racking up piles of debt, which makes for some really tough cuts later on, as Cliff's investors saw this past year when the company slashed its dividend. That's why it's important to see how quickly a company like Goldcorp is reacting to the changing gold market.

In fact, it's the company's ability to adapt along with its strong balance sheet that makes Goldcorp a great way to play the potential rebound in gold. If you'd like to learn more about the gold market, be sure to check out The Motley Fool's new free report, "The Best Way to Play Gold Right Now", as it dissects the recent volatility and provides a guide for gold investing. Click here to read the full report today!

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