Miners' Shares Tumble as Gold Price Drops to Near Three-Year Low

By Alex MacDonald and Devon Maylie

Gold miners' share prices tumbled Thursday as gold prices dropped to their lowest level in nearly three years, heaping more pressure on mining companies to slash costs and trim production of the metal.

The NYSE Arca Gold Bugs index--which tracks 16 of the largest gold-mining companies including Canada-based Barrick Gold Corp. (ABX), the world's biggest, and South African-based AngloGold Ashanti Ltd. (ANG.JO, AU)--fell 6.5%, while the price of gold futures dropped 6.2% to $1,289 a troy ounce in afternoon U.S. trading. The Gold Bugs index is down 48% since the beginning of the year.

The slump came as investors digested comments from the U.S. Federal Reserve that stoked fears about a scaling back of bond purchases, which have been a crucial support for gold prices. Investors and mining companies are bracing for gold's steep slide to continue as the central bank plans to wind down its stimulus program if economic conditions permit. Bullion metals are considered a hedge against the inflation and currency weakness that such stimulus measures can trigger.

In the European session, gold tumbled 4.7% below Wednesday's settlement price on the spot market to trade as low as $1,286.27 a troy ounce, its lowest price since September 2010, and the first time that the metal had traded below the $1,300-an-ounce level since then.

Market participants Thursday said gold prices around the $1,300-an-ounce mark will make many miners unprofitable as production costs are rising, and some will be forced to cut supply.

"At these prices, marginal projects will look increasingly marginal," said Steve Poulton, investment manager at Altus Strategies, an investor in mid-cap and junior gold miners. Mr. Poulton, however, expects gold prices to rise toward the end of the year. "At the moment, speculators are betting that other speculators are expecting lower gold prices, but once this trade has played out I think we will see more buyers than sellers."

Gold miners said they will proceed with cost cuts and efforts to improve efficiency.

"The weakness in the gold price highlights the need to press ahead with the work already under way across our business to realize further productivity improvements, reduce costs and focus on free cash flow," said an AngloGold Ashanti spokesman.

African Barrick Gold PLC (ABG.LN) said in April that the gold-price slump had given the company even greater impetus to cut costs in order to generate sustainable cash flows.

Gold miners are facing the prospect of profit-margin squeezes and write-downs on the value of mineral reserves this year due to the sharp decline in gold prices.

"Gold mining companies have been forced to revise capital expenditure programs, cut costs and delay new projects," said Nord Gold N.V. (NORD.LN) Chief Executive Nikolai Zelenski. "It is reasonable to expect a plunge in production in 2013 due to declining gold output from existing mines, which are at the upper limit of the global cost curve."

Mr. Zelenski said that worldwide gold production could also fall after 2013 since the gold price could take longer than expected to recover to levels that would encourage further investment in new gold mines.

Newcrest Mining Ltd. (NCM.AU), Australia's biggest gold producer by market value, said last week it expected to incur as much as 6 billion Australian dollars (US$5.7 billion) of write-downs due to gold's sharp slide this year and that it was unlikely to pay shareholders a final dividend.

"Gold-mining companies have made significant efforts in recent months as far as corporate governance and capital allocation is concerned," said Alain Corbani, chief executive of French investment firm Commodities Asset Management. "Once gold prices stabilize, the markets will recognize value in the gold mines" that have made these improvements, he said. The firm's Global Gold and Precious Fund has 12 million euros of assets under management, down from EUR18 million when the year began.

--Francesca Freeman and Laura Clarke contributed to this article.

Write to Alex MacDonald at [e-mail]

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