Gold Miners Adjust as Debt Ceiling Looms

A new risk event approaches Washington. Congress needs to raise the debt ceiling to prevent a debt default. Investors are flocking to safe haven assets as a hedge against an unstable financial economy. Low-cost miners Barrick Gold and Newmont Mining are most likely to benefit from gold's safe haven appeal. Gold miners have initiated cost cutting to expand profit margins given rising gold prices. Market Vectors Gold Miners ETF could advance further if gold miners reap the rewards from uncertainty on Capitol Hill.

Barrick, the world's largest gold producer, plans to create shareholder value through disciplined capital allocation. The Toronto-based miner looks to save $2 billion from this year's budgeted capital expenditures and costs. Over the past four years, the company has deferred about $4 billion in capital spending. Sharp cutbacks intend to strengthen its balance sheet liquidity and maximize free cash flows from mining operations.

Sales of high-cost assets
Barrick lowered its 2013 all-in sustaining cash (AISC) guidance to $900-$975/oz, Barrick CEO Jamie Sokalsky said at the Denver Gold Forum in Colorado. At these levels, Barrick is the lowest cost senior gold producer among its industry peers. Barrick is focusing on five core low-cost mines located across the Americas -- making up 60% of the company's gold production at an AISC of $700/oz.

Source: Barrick Gold

Barrick launched a strict operational review on assets that operate above an AISC of $1,000/oz. About 25% of this year's production operates above that level. Mr. Sokalsky said these mines could undergo mine plan changes, go for sale, or shut down. Barrick strives to establish an asset portfolio that delivers sustainable value for investors, which offers financial flexibility given any gold environment.

Barrick has already offloaded risky, non-core assets in Australia after selling three mines to Gold Fields for $300 million in August. Barrick may sell two more assets in Western Australia -- the Plutonic and Kanowna Belle gold mines. Barrick values Kanowna at about $55 million. Deutsche Bank prices Plutonic between $45 and $77 million. The miner could use the additional cash to bolster its balance sheet and pay down short-term debt.

Possible joint ventures
Newmont Mining is interested in acquiring gold and copper mines to create new sources of revenue growth. The company seeks low-cost, long life assets in low risk jurisdictions. "Now is the time when the markets are down to be looking at potential for acquisition of assets," Newmont CEO Gary Goldberg said in an interview in Denver. "We're still looking at things." Barrick has no plans to operate any new mines.

The Denver-based miner is open to forming acquisitions with other companies or joint ventures at existing assets. Mr. Goldberg said the market has provided companies an opportunity to work together to ramp up fundamentals at their respective mining operations. Newmont may partner with Barrick to reduce costs at their Nevada mines.

Mr. Sokalsky said he will consider cooperating with Newmont. A joint venture between the two miners would expand sales channels to facilitate growth in Nevada. Barrick and Newmont would see all-in cash costs fall with stronger productivity at the mines.

Newmont posted a $2 billion loss on a $1.8 billion impairment charge last quarter. It managed to save $362 million from spending cuts in the first half of the year.Management seeks to strengthen mine plans and cost structure at its less profitable mines, which in turn generates higher returns for shareholders. For 2015, the company promises investors 10-15% in cost savings and lower-cost, longer-life gold and copper mines.

Gold equities gain on political tensions
Lawmakers need to raise the $16.7 trillion debt limit by mid-October or the U.S will be unable to pay its bills and will default on its debt for the first time. Political tensions could affect the state of the economy, triggering a sell-off equity markets and buying in safe haven assets, reflecting the last debt ceiling crisis in 2011.

Gold prices tend to climb with rising U.S statutory debt. Source: GoldSwitzerland

"Financial market and economic consequences would likely be more severe if the debt limit is not raised than under a government shutdown," Moody's Investor Service said in a report. "The perception that the U.S. government could default on debt servicing if the debt limit isn't raised could roil financial markets and damage business and consumer confidence."

Higher gold prices would help Barrick and Newmont - both a part of the Market Vectors Gold Miners ETF -- generate higher returns from their low-cost mines. The Gold Miners ETF has seen $1.8 billion in net inflows in September. Net inflows could balloon if uncertainty rises on Capitol Hill.

Bottom Line
Gold miners have focused on reducing costs to maximize profits and cash flows at their mines. Gold miners have fallen to attractive prices because of the bearish gold market in April. I advise investors to search the market for undervalued miners with strong fundamentals. Barrick and Newmont promise investors strong returns with their ongoing portfolio restructuring. If Congress delays raising the debt limit, credit agencies will start to question America's credit worthiness. Gold prices should run up if political tensions worsen.

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