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What the Troubled Gold Mining Industry Means for Gold Prices

Is a mine merger in the works? What does this mean for gold investors?
Is a mine merger in the works? What does this mean for gold investors?
Photo by Sean Gallup

Over the past week two major gold mining companies, Barrick Gold Corp. and Newmont Mining Corp., have been holding talks about a potential merger without any deal being made thus far. Negotiations broke down after the parties disagreed on plans for a spin-off company. The terms that were agreed upon were Barrick buying Newmont for $13 billion in stock.

The two companies are currently faced with falling gold prices, specifically a 30% drop since its peak price back in 2011. This obstacle drove the companies together for the merger talks.

Both companies operate out of Nevada, so pooling their resources and joining forces would help each company lower production costs and still turn a decent profit in the face of lower gold prices. Think of Coca Cola, who have acquired several other beverage companies such as Minute Maid, Odwalla, and Fuze Beverage over the years. This is largely why Coca Cola and its associated beverages remain so inexpensive, yet Coca Cola remains one of the most profitable companies in the world.

What is currently happening in the mining industry is that mines are producing at a cost that is dangerously treading the line of profitability. For example, a study in late 2013 by John Tumazos Very Independent Research found that one third of the gold mines included in the study had total pretax production costs of $1,250 to $1,750 per ounce. With gold selling at around $1,300 an ounce as of late, these companies are just barely turning a profit at their lowest production cost.

Also occurring here is a supply problem. Mines are not producing as much gold as they could be due to the high production costs and low gold prices, inflating the price of gold at the moment.

Resources: American Hard Assets