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Chinese Gold Diggers Drop Their Shovels As Gold Miner Bankruptcies Begin

Tyler Durden's picture


For those wondering where US shale exploration and production companies will be in about 2-3 years, look no further than the gold miners, where the disconnect between undaunted physical demand and relentless paper supply (after rebounding above 0%, GOFO is once again negative through the 3 month mark), and where high production costs and low selling prices, after two years of balance sheet pain, is finally leading many over the cliff. Case in point, Canadian gold-miner San Gold, which had a capitalization of over $1 billion in 2010 just filed for bankruptcy protection. It isn't the first gold-miner to wave the white flag, and it certainly won't be the last.

As the WSJ reported earlier, the Winnipeg-based company said in a statement that it has asked Canadian courts for an initial 30 days protection from its creditors as it seeks to restructure its business.

“San Gold spent half a billion on their assets, and they haven’t had a profitable quarter in six years,” said Greg Gibson, who became CEO in June after a boardroom revolt against the previous management.

The problem, as gold miners (and their long-suffering shareholders know) and as shale companies are about to find out, is that "the sector had overstretched itself during the commodity boom, when the high gold price, and willing investors, saw miners spend heavily on acquisitions and bring new production on line. Some of the sector’s new production was lower grade gold, which is more expensive to mine and became unprofitable as the price of gold fell."

This all happened before the Swiss National Bank imposed its currency controls by way of a EURCHF 1.20 floor on September 6, 2011 as the Eurozone was tearing apart, and which, incidentally, also marked the record high in the gold price. Since then gold has tumbled by a third and many of the smaller miners have gone bankrupt while others have stopped production or exploration as they look to raise cash.

As Gibson said, “The party is over and its time fix things" and now even the big companies, those which have access to Wall Street's ZIRP capital are starting to fold.

But it's not just western gold miners that are finally starting to feel the pain of three years of declining gold prices: even more importantly, according to Bloomberg's Chart of the Day, China's "gold diggers" are also preparing to drop their shovels.

As a reminder, China surpassed South Africa as the top bullion producer in 2007 as surging prices spurred domestic companies such as Shandong Gold and Zijin Mining Group. Global production reached a record high in 2013, according to the World Gold Council. China’s output may exceed 470 metric tons this year, up from a record 428 tons last year, according to the China Gold Association.

That is about to change: monthly output growth in China almost stalled in August through October, World Bureau data show. Miners’ costs are mostly higher than spot prices, increasing the likelihood of writedowns next year, Nick Holland, chief executive officer of Gold Fields Ltd., said Nov. 20. The production cost per unit for Shandong Gold Mining Co., one of China’s four biggest gold miners, will rise to 150 yuan per gram ($749 an ounce) in 2015 from 146 yuan now, UBS’s Lin estimates. And while Shandong will still be profitable, many of its peers will not be so lucky.

As a result, Chinese gold miners, which ramped up production are poised to begin reducing output as the price slump begins to bite with a several year delay. Putting it in context, Chinese mine output rose 15% in the first 10 months of this year, outpacing a 3.4% gain in the global total, according to World Bureau of Metal Statistics data, even as gold prices declined.

“We will see output growth moderating going forward into 2015 as miners perceive a downtrend in gold prices to persist,” said Lin Haoxiang, an analyst at UBS Group AG in Shanghai. “Falling prices are cutting into some high-cost private mines in China, while some big miners chose to reduce costs by reducing jobs and capital investments.”

The bottom line: just as everyone expects oil production to decline as capital spending plunges, the reality is that for the next couple of years domestic oil production will actually surge as producers try to put their competitors out of business while collecting every dollar of demand cash that is available, a process described previously. For the gold miners, however, the buffer period is now over even with the benefit of ZIRP providing cheap funding extending the inevitable collapse, not only in the US but also in China. And as gold prices continue to slide, the marginal cost producers - who have been living onborrowed time for year - are about to fold en masse.

What happens next is that physical gold supply is about to slide, even as demand for physical gold remains solid, or even rises more now that India is once again easing import regulations. The only question is how will relentless paper gold supply impact the price of gold and can the world hit a thought experimental state where the cost of gold is so low that physical production is completely mothballed and where the price of gold is set entirely by paper contracts representing said non-existent physical. Impossible? Then read the fascinating story of how an otherwise bankrupt Radioshack is kept in a pseudo-alive zombie state thanks to $25 billion of Credit Default Swaps who just can't envision the company folding. Now reverse that and apply it to gold.

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Wed, 12/24/2014 - 19:50 | 5589841 ebworthen
ebworthen's picture

Well, those miners must have been levered to the hilt because the price hasn't dropped that much, and with oil down -50% their costs should be that much cheaper.

Mismanagement, speculation, and "shooting the moon" usually get companies to the belly up phase.

How did anyone ever mine Gold before 2009-2010?  I smell a rat, or three.

Wed, 12/24/2014 - 20:08 | 5589872 wee-weed up
wee-weed up's picture

There's nothing wrong with the price of gold...
End the manipulation and you will see.

Wed, 12/24/2014 - 20:26 | 5589911 Keyser
Keyser's picture

One can only assume that the price of gold will drop to $0.00 when production halts and demand skyrockets... Got it... 


Thu, 12/25/2014 - 01:13 | 5590350 Luckhasit
Luckhasit's picture

Al Gore math aka fuzzylogic.

Thu, 12/25/2014 - 06:38 | 5590550 Bindar Dundat
Bindar Dundat's picture

The real problem is we are measuring the value of gold in U.S. dollars -- money and currency have long since disconnected from any form of rational connection  sortof Al Gore economics....

Wed, 12/24/2014 - 20:34 | 5589924 Quinvarius
Quinvarius's picture

They were never profitable.  They were able to sell stock, take out loans, and do financial deals because of the gold price.  But it was never high enough to give them a future.  That is why their stock prices never went up to any sort of new highs the whole time.

Wed, 12/24/2014 - 21:17 | 5590001 flash338
flash338's picture

They haven't been profitable in six years??  Even with gold at 1900 a few years ago?? Sure miners have had it rough for while and some will go belly up, but making conclusions based on one crap company. Shit article.

Wed, 12/24/2014 - 22:39 | 5590041 Lore
Lore's picture

No, I think the writer has it bang on.  Something like 90%+ of listed companies have nothing but moose pasture and line their pockets by issuing paper like central bankers, diluting their capitalization and punishing shareholders. When's the last time you saw a real major discovery?  It's no wonder that mergers and acquisitions reached a practical standstill over the last few years.  Like the central banking environment, the entire mining sector is long overdue for cleansing.  That said, we're finally seeing nibbles.  In an environment of shrinking risk tolerance, the sweet spot for investment seems to be the handful of emerging producers:  Zijin Mining takes stake in Canada gold company (8-Dec)

Thu, 12/25/2014 - 11:14 | 5590791 outamyeffinway
outamyeffinway's picture

Quinvarius, you're a fool. Plenty were profitable and I'm looking at chart after chart after chart where many miners hit new highs. What the FUCK are you talking about?

Fri, 12/26/2014 - 02:56 | 5592457 Lore
Lore's picture

Depends on your frame of reference. Which companies are you looking at, within what time frame?  Ahhh, never mind. Nobody comes back to look at old comments anyway.

Wed, 12/24/2014 - 21:59 | 5590054 Squid-puppets a...
Squid-puppets a-go-go's picture

it only hit the $1700-$1900 region for a short phase, i dont imagine enough was sold to market to provide a cushion for oil at $100 for all that long

put it this way, the average oil in the 10 years preceeding the GFC wa, what - around $25/barrel, and gold perhaps $500 / ounce - so at $100/barrel youd want gold at $2000

this is backo the napkin stuff, but theres been a few ZH articles showing that at $1250 / $100 range about 60% of gold producers are underwater


Thu, 12/25/2014 - 11:16 | 5590794 manofthenorth
manofthenorth's picture

Mining is incredibly expensive. The Palmer Deposit that Constantine is exploring near our claim has been studied for years. They have spent 10's of millions of dollars drilling and assaying in just the last 2 years. In a year or 2 more they will know IF it will be possible to mine at a profit !! Then they can start to try to get permitted for production, then it will take years and 100's of millions of dollars to start production IF they get permitted. This is a high grade poly metal deposit like Hecla's Green's Creek Mine on Admiralty Island, the biggest Silver producer in North America but pre production costs are GIANT !! It will take many years to become profitable , IF EVER !  Even if prices come back up, the damage has been done to the industry, it will take years to get get new projects with new investors on-line. Mining unlike "wealth creation" in markets requires massive investments in physical resources that takes many years to repay. TOUGH BUSINESS.

Wed, 12/24/2014 - 20:43 | 5589946 DutchR
DutchR's picture


So they are mining 400 tonnes a year for how long, and they export how much?

Barbarous relic

Thu, 12/25/2014 - 02:17 | 5590405 ZH Snob
ZH Snob's picture

this is great news for any self-respecting holder of gold.  who needs more on the market?  anyway, once the price takes off to where it should be (and eventually way beyond), there will be plenty of mining for all.

Wed, 12/24/2014 - 19:52 | 5589842 Yen Cross
Yen Cross's picture

 Let the games begin/ Bitchez

Thu, 12/25/2014 - 03:44 | 5590459 New World Chaos
New World Chaos's picture

Driving gold miners to bankruptcy is a cheap way for bankers to buy gold.  Cheap as in free.  They create those loans out of nothing.  On top of that, they can get bailouts to cover their "losses".  They can even use the Fed discount window to get 0% margin loans to short gold.

Thu, 12/25/2014 - 15:26 | 5591263 Cynicles
Cynicles's picture

Fractional Reserve Banking while being fully covered by the US tax payer.

Nice racket.

Wed, 12/24/2014 - 19:54 | 5589846 screw face
screw face's picture

as we say in Oregon keep stack'en and pack'en

Wed, 12/24/2014 - 20:02 | 5589860 godzila
godzila's picture

And what about the effect of $50 oil to those gold mining operations ? Last time I checked energy was a massive part of the cost associated with running a gold mine !

Wed, 12/24/2014 - 20:04 | 5589866 Latitude25
Latitude25's picture

According to the article the Chinese use shovels, not oil.  LOL

Wed, 12/24/2014 - 20:15 | 5589887 Peter Pan
Peter Pan's picture

Perhaps the problem arises becauses gold is a by product for many mines. In other words no one is going to mine copper just to get gold.

This is only a guess and there would no doubt be many other factors as well.

Wed, 12/24/2014 - 20:35 | 5589929 DeadFred
DeadFred's picture

It's certainly the case for silver.

Thu, 12/25/2014 - 11:17 | 5590796 manofthenorth
manofthenorth's picture


inelastic supply with just in time delivery

Thu, 12/25/2014 - 05:18 | 5590502 Jano
Jano's picture

the analysis on the impact of energy on gold price was running few days ago.

gives a bit more time to the miners.


Wed, 12/24/2014 - 20:10 | 5589878 hidflect
hidflect's picture

There's been a "mystery" for the last few years as to the gold price. Although the Chinese have been buying tons and tons the price has continuously been declining. It's occurred to me that the  question is this: What do the Chinese do with their gold? Do you think (as many gold bugs assume) that they put the bricks in the corner and go, "Bwahahaha" and simply sit on it? For zero return? I know Chinese. They are incurably short term gamblers. What they are doing is re-loaning the gold via re-hypothecation (legal in the City Of London) out multiple times to the ETF (Electronically traded funds) market. This further lowers the price allowing them to buy even more. Of course, they hold the physical gold with themselves simply issuing scrip as collateral. Either way, they win. It's a scam of ginormous proportions. If ETF gold collapses due to non-delivery then the physical price will rocket sky-high: they win. If they maintain a low price they continue to accumulate at below market prices. When it bursts, all paper gold holders will be bankrupted.

Wed, 12/24/2014 - 20:18 | 5589893 Peter Pan
Peter Pan's picture

Do you have a link for this? Sounds possible, but are you saying that the Chinese have their gold in London or that the City is happy to accept their gold loans over the phone and fax? I am not  familiar with the mechanics of the ETF's so forgive me if my question does not make sense.

Good comment though and worthy of discussion.

Wed, 12/24/2014 - 20:37 | 5589933 Bay of Pigs
Bay of Pigs's picture

This Chris Powell (of GATA) interview with Greg Hunter is outstanding.


Thu, 12/25/2014 - 08:02 | 5590591 Arius
Arius's picture

Wow ... that was something ... no wonder I never recall your name associated with any comment. you must be somewhere up the food chain.


The chinese the "incurable short term gamblers"... you do not mean the communist party officials now do you? when you say "i know chinese" you mean the chinamen down the street right?


Chinese the masterminds beyond world markets  - thats something .... you might want to share that idea with an hollywood producer. 


Now, if you could claim North Korea is this internet superpower, where the students graduating in computer science have not heard of internet ... I guess anything goes.


So, the chinese are now the big manipulators ... wow these devils  I thought was them all along ... BUT now I can see it is you BARZINI


china, russia, india anything but the truth .... someone said it above, the banks are driving miners into bankruptcy so they can steal it.  It is simple staring at our face.  these guys are never going to allow some chinamen steal it from them ...

from the looks of the message you must be on the inside ... give us a break and dont insult our intellengence ... everyone knows the shit, get it over with

Wed, 12/24/2014 - 20:11 | 5589881 OldNewfy
OldNewfy's picture

C'mon.  This is not so different than any other bidness in itself... if you have a cheaply-obtained resource, let' er buck, and if you can sell  at a profit, then Yippee-Yi-Yo-Ti-Yay to you and your shareholders.  If you are struggling with a wimpy resource grade or high operating costs,  then you're out of business.  As to "The only question is how will relentless paper gold supply impact the price of gold and can the world hit a thought experimental state where the cost of gold is so low that physical production is completely mothballed and where the price of gold is set entirely by paper contracts representing said non-existent physical." The  "in your hands" above-ground supply dwarfs the pace at which new gold enters the existing surface pool of gold.   Hopefully we'll never know (given that, as humans, we're all miners, farmers or hunters anyway) , but FWIW, I think the way the sheer size of the existing aboveground supply moves around (depending on the whim of trader/government/ financial entity)  has huge and singular influence on the price,  and it's  absolutely not whether some guys  who convince themselves they had a nice prospect  eventually go bust. . Best regards and happy holidays

Wed, 12/24/2014 - 20:22 | 5589901 Yen Cross
Yen Cross's picture

¶  much?

  You aren't going to get out when the door closes.

Wed, 12/24/2014 - 20:27 | 5589909 Osmium
Osmium's picture

Why would you dig gold out of the ground when you can buy it for less from the Comex warehouse?

Thu, 12/25/2014 - 09:37 | 5590680 _ConanTheLibert...
_ConanTheLibertarian_'s picture

until you no longer can ...

Wed, 12/24/2014 - 20:28 | 5589915 OldNewfy
OldNewfy's picture

Exactly right, when you buy it an the Comex, and have it in your hands, you're good to go.

Wed, 12/24/2014 - 20:40 | 5589935 Yen Cross
Yen Cross's picture


 In theory you're correct. Have you ever taken delivery of "physical" gold?

  Do you even know the denominations gold ingots are shipped in?

Wed, 12/24/2014 - 20:51 | 5589956 DutchR
DutchR's picture

Don't bother Yen Cross, OldNewfy Member for 2 years 4 weeks and two comments, only today.

See this a lot, it's sickening.

Wed, 12/24/2014 - 21:58 | 5590068 Kaiser Sousa
Kaiser Sousa's picture

fuck'em, they r for the most part responsible for their plight...why would u continue to supply real money at these phony ass paper prices when u SHOULD know that its REAL MONEY and should b MULTIPLES the fake ass paper price...

how many times does it have to be said...starve the fucking BEASTS and u KILL THE FUCKING MONEYCHANGERS GRIP ON HUMANITY...


Wed, 12/24/2014 - 22:26 | 5590116 fzrkid
fzrkid's picture

Low grade gold...

Who knew?

Thu, 12/25/2014 - 02:02 | 5590393 Fuku Ben
Fuku Ben's picture

We sold our mining operation about a year ago. It was a tough decision at the time but in hindsight it was an excellent call. As things stand now we would be fighting off bankruptcy and hoping for an upswing which doesn't seem to be coming in the near future. Especially as the commodity controls appear to be creeping into place as they criminally hedge the risk of the inevitable collapse of their ponzi fiat fraud in an attempt to prevent SHTF

That call and the Fuku Fund annualized return made this a win win year

Thu, 12/25/2014 - 08:11 | 5590607 Arius
Arius's picture

"We sold our mining operation about a year ago".


I bet you 99 to 1, the buyer was not some chinese, but most probably some swiss based operation ... these guys are always slow , too traditional, and they do not seem to understand the importance of profits for next quarter earnings and so on; the chinese on the other hand are incurable short term gamblers.

Thu, 12/25/2014 - 05:45 | 5590521 GoldSilverBitcoinBug
GoldSilverBitcoinBug's picture

Gold mining down, demand up,  price down if not crashing --> Free Markets s/

The Gold "market" is the most manipulated market in the world, that will end bad, vary very bad.

Merry Christmas !

Sat, 12/27/2014 - 02:16 | 5595497 MeelionDollerBogus
MeelionDollerBogus's picture

Phew! That's a close one. Here I was thinking oil might be rigged. Now I can breathe easy knowing that market isn't rigged at all.

Thu, 12/25/2014 - 11:55 | 5590843 oddjob
oddjob's picture

SanGold's Rice Lake mine was unprofitable with Gold at $1900.

Thu, 12/25/2014 - 14:36 | 5591119 FranSix
FranSix's picture

I expect that bankruptcy in this case would be due to mining method, and poor grade controls. The deeper you go in the mine, the more marginal the grade from the simple fact that ore has to be brought to surface, and you would be cutting corners to do it. The fundamentals for mining gold in Canada are truly spectacular, however because the $CAD has fallen in the last two years.

Gold doesn't just magically appear in the futures markets. And by all accounts the little gold that is being delivered is supplied out of central banks, or accounts allocated or not, and being hoarded by geopolitical rivals.

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