Forbes – Goldcorp And Why Gold Miners Are Getting Crushed: Massive Cost Inflation, Dropping Prices

It hasnt been a hospitable environment for gold miners, the embattled sector which has had to suffer both falling commodity prices and rising costs. Reporting second quarter earnings before the bell on Thursday, Goldcorp GG -0.28% proved to be the latest victim of the new paradigm in the gold miners world, being forced to take a $1.93 billion write-down on the declining value of its assets, as management reacted to its market capitalization falling below the companys net asset value. Despite a recent rally in the sector, and in the yellow metal, itll take dramatically higher prices to push Goldcorp, and the broader sector, into true rally mode.

Goldcorps second quarter earnings release, which revealed a dramatic 65% drop in adjusted net earnings to $117 million, is punctuated by references to tanking gold and commodity prices and troubles of operating in this environment.

Revenues and operating cash flows were significantly impacted by lower realized gold prices, read one quote by chief executive Chuck Jeannes. The sharp decline in commodity prices seen in the second quarter of 2013 and the Companys market capitalization falling below its net asset value are deemed to be indicators of potential impairment, reads another line of the release, where the company noted the nearly $2 billion write-down on the falling value of its marquee Peñasquito mine in Mexico.

Goldcorp missed profit estimates by 9 cents, earning $0.23 per share. The major miss was substantiated by a 25% drop in adjusted operating cash flow to $388 million and an 18% decline in revenue to $889 million; analysts expected net sales to come in at $1.15 billion.

Production costs rose 22% to $545 million, the release showed.

Cost pressures have been rising despite falling gold prices, and theres little miners can do but to cut costs elsewhere. Last quarter, Barrick Gold ABX +2.39% maid it painfully clear that miners will face this trend, and Goldcorp reinforced it. Total cash costs by-product, which controls for the sales costs of by-product silver, copper, and other metals, surged 75% to $646 per gold ounce. Total cash costs on a co-product basis, which allocates each of the by-product costs in relation to sales, increased 15% to $713. Goldcorp expects total cash costs of $1,000 to $1,100 per ounce on an all-in sustaining cost basis.

The company managed to increase gold production in the quarter by 12% to 646,000 ounces, but average realized prices slid 12% to $1,414 an ounce. After rallying over the past few weeks, gold was trading around $1,330 an ounce on Thursday. When it comes to silver, not only did realized prices drop a dramatic 30% to $17.01 an ounce, production also slumped 12% to 7.18 million ounces. In terms of copper, production slid 31% to 21.6 million pounds, while realized prices rose 12% to $2.63 a pound.

Management is looking to trim the fat wherever it can to face the challenging environment. It expects capital expenditures to be $200 million less than expected this year, but will still shell out $2.6 billion, while $16 million will be cut from general administrative and exploration expenses. The miner remains 100% unhedged.

Relative to its peers, Goldcorp remains one of the years best performers. The stock fell nearly 25% to Wednesdays close, in-line with gold prices, but remains well above Barrick Gold, Kinross Gold KGC +0.93%, and the broader gold miners ETF. Newmont Miners is the true winner, coming in essentially flat this year.

The reality is that its not the best time to be in the commodity sector, much less so in the gold mining business. China is engineering a slowdown that will affect demand, while India has moved to clamp down on its gold markets. With the two largest consumers of the yellow metal reducing their intake, Federal Reserve Chairman Ben Bernanke has also begun to exit his ultra-accommodative stance, putting further pressure on bullion which rises on monetary largesse. Add rising mining costs and you have a recipe for disaster.

Agustino Fontevecchia, Forbes Staff

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