Credit stress test of gold miners makes grim reading

Many gold miners' balance sheets – already punished by write-downs and blowout project costs – could be pushed to the edge if the weakness in gold persists.

All-in sustaining cash costs which take into account among others by-product costs, sustaining capital and exploration expenses are much higher than those that are routinely reported in the financial statements of gold mining companies.

According to one study the average total production cost for gold miners was $1,170 an ounce, compared with an average reported cash cost of $773 an ounce.

"Below $1,300 gold, about 30 to 40 percent of mine production is probably not cash-flow positive," Joseph Wickwire, the Boston-based manager of Fidelity Investments’ Select Gold Portfolio told Bloomberg.

The newswire also quotes research from RBC Capital Markets that shows a gold price of less than $1,300 for an extended period could translate into credit downgrades for the top producers:

“We would expect all the gold producers in our coverage universe to cut all discretionary expenses, cut capital spending sharply, defer new capital development programs and in some cases cut dividends” at that level, RBC’s Stephen Walker, Dan Rollins and Sam Crittenden said in the note.

RBC estimates the average all-in costs for North American gold producers at about $1,200 an ounce with Iamgold spending the most at $1,417 an ounce followed by Kinross (TSE:K) and Newmont (NYSE:NEM) at $1,150, Agnico -Eagle (NYSE:AEM) at $1,075, Eldorado (TSE:ELD) $1,066, Goldcorp (TSE:G) and Barrick (TSE:ABX) at $1,050 and Yamana (TSE:YRI) gold the most efficient extractor at only $858.

According to the RBC stress test Barrick is already at risk of a downgrade at the current gold price, but at $1,200 the world's largest gold producer faces junk status.

Barrick's shares were some of the hardest hit in the gold sector over the last week.  The counter has lost more more than 28% or a whopping  $8 billion of its market value in a sell-off that started last Wednesday when a court in Chile ordered a halt to work at its massive Pascua-Lama project.

While some gold miners managed to recover a bit as gold stabilized, Barrick shed another 5%  on Tuesday and is now worth just over $19 billion on the Toronto bourse. That compares with a market worth of  $54 billion in 2011.