Friday, July 25, 2014

Goldman on Gold: "Target $1,050 an Ounce, But $1,200 is the Real ‘Floor’"

$1293.60 last, up $2.80.
From Barron's:
Goldman Sachs’ commodity strategists write this week that they remain doubters of gold’s 2014 rally, sticking to their prediction that the metal will reach $1,050 in price by the end of the year. To come true, it would mean a slump in gold’s price of 19% or greater from current levels. That’s pretty bearish.
But the GS’ strategists’ bearishness has a limit. In a note to clients this week, the strategists write that they expect the $1,200 level, or roughly 7% beneath Thursday’s prices, to function as “a good estimate of the floor price for gold.”

A price of $1,200, they write, is the 90th percentile of all-in sustaining costs in the gold-mining sector. Putting it more plainly, it’s the price below which more producers have to think about scaling back their gold output. Go appreciably below this level and the pressure builds. The result in that case should be lower output....MORE
And from Kitco, a story we'll be referring back to:

Mining Companies Need To Overhaul Business Models To Right Ship – Ernst & Young
According to Ernst & Young, the mining industry needs to revamp its business models if it wants to reverse a decade-long trend of decline in productivity.

In a mining report released Thursday, titled Productivity in mining: A case for broad transformation, EY notes mining companies chased production growth at the expense of productivity on a volume and cost basis.

“Companies caught in the race to capitalize on high commodity prices are now facing a number of business model challenges,” said Bruce Sprague, EY’s Canadian mining and metals leader. “Operation expansion and inefficient use of labor and equipment are all compromising productivity.”

Sprague added that there are no easy solutions; highlighting cost-cutting exercises, minimal process and technology improvements are not enough to circumvent the damage that has been done.

In the report, EY describes productivity as a gain that “should be measured as a form of optimization, i.e., the highest ratio of output to input, which could in fact mean achieving higher productivity with lower input.”
The report highlights labor productivity as a major piece to the decline, which they attribute in part to the increasing complexity of operations, but more so to inadequate skills brought on during the boom time.

Another issue is capital productivity, according to EY. Part of the list includes long lead times between investment and production, ineffective portfolio management, issues with capital allocation decision-making, resource nationalism, as well as others....MORE
Here's the EY press release and download site:
Business transformation needed to address mining productivity