This was the question posed by Gold Fields CEO Nick Holland at his keynote presentation to the Australasian Institute of Mining & Metallurgy in Brisbane on Monday. Holland opted to analyse how the industry – as measured by the 11 largest gold producers responsible for roughly 30% of production – had fared over the four years between 2012 and the end of 2015.

The biggest casualty was the gold price, which, after peaking in 2011 at $1 900 per ounce, dropped to just over $1 000 an ounce in December 2015. This imposed all sorts of changes on the industry according to Holland. “The producers of course reacted. We cut our costs significantly.” By Holland’s calculations, all-in sustaining costs (AISC) fell by 22% over the period, and all-in costs (AIC) by 36%. (AIC includes stay-in-business capital which comprises the exploration and capital expenditure required to sustain operations).

But how was this achieved and was it sustainable? Holland suggests much of the improvement in costs has come from factors outside of producers’ control. “We worked out that in this peer group of 11 companies about 50% to 60% of their production is in so-called soft currencies or commodity currencies. The rand, the Aussie dollar, the Canadian dollar. And of course those three currencies have depreciated a lot since 2012 up until the end of 2015: 47% decline for the rand, 26% for the Aussie and the Canadian by 21%,” said Holland.

The same applies to oil, which by Gold Fields’ estimates accounts for between 10% to 15% of all cash costs for the peer group. Interest rates – at record lows – has also massively benefitted over-indebted companies.

The focus on costs and cash flows yielded results. “As a group of 11 companies, we went from a net debt to Ebitda (Earnings before interest, tax, depreciation and amortisation) ratio of 1.89 to 1.45,” says Holland.

But besides fat, it appears companies have also been cutting muscle. As a percent of operating expenditure, stay-in-business capital decreased from 46% of operating expenditure (Opex) in 2012 on a per ounce basis to 26% in 2015 (see graph below).

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“How is it possible that companies can drop their stay-in-business capital so much when their operating costs have stayed reasonably constant?” asks Holland. “I believe that they have merely deferred capital that is going to come back, because if you want to sustain the business into the future, you need to spend that money. That for me is a little bit of a concern.”

Together with the reduction in SIB capital, exploration spending has been annihilated, both from the amount of money spent and from the decline in reserves being seen in the industry.

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So to accurately understand the changes to costs that have come about from factors outside of the control of companies, as well as the unsustainable reduction in SIB capital, Gold Fields conducted an exercise. They did a calculation on what the impact on costs would have been if all of the factors stayed the same. The result: costs would have only declined by 4% over the period – from $1 115 an ounce in 2012 to $1 060 an ounce in 2015.

Which means that if the benevolent tail winds the industry has enjoyed reverse (higher oil prices and interest rates; strengthening of currencies in operating countries), the current picture will not be so rosy.

The cutting of corners on SIB capital can only go on for so long. “One of the reasons that there has been such a competitive dogfight for acquisitions of late is that some of the major companies can see some gaps in their production profile,” says Holland.

So the implication is clear – by cutting unsustainably and relying on good fortune, the industry is going to have to play catch up. That might result in poor capital allocation decisions and higher costs in the future. And poor returns are something investors may not be enthralled to digest again just yet.

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