The world gold industry is in trouble

                                                                                         

The world's leading gold producers are in trouble, faced with declining production and rising costs.

Barrick Gold, the world's largest producer of the precious metal, said second-quarter profit fell by 14% as mining costs rose and the company shed hedge contracts.

Net income fell to US$396 million, or 45 cents a share, from $459 million, or 53 cents, a year earlier. The cost to exit 500,000 ounces of forward sales contracts at below-market prices reduced profit by US$66 million, or 8 cents a share.

Barrick posted its first quarterly loss in more than five years in the first quarter after incurring US$557 million in costs to exit 2 million ounces of gold contracts. Costs to produce gold rose by 23% to US$345 an ounce, in part because of gains in the A$.

The A$ averaged 11% higher against the US$ in the second quarter compared to the same period last year.

The news isn't much better at Newmont Mining. The world's second-biggest gold miner, posted a US$2.06 billion quarterly net loss because of costs to close its investment unit and exit money-losing sales contracts.

The second-quarter loss was $4.57 a share, compared with net income of US$161 million, or 36 cents, a year earlier. Gold sales fell by 9.8% to 1.248 million ounces.

Acquisition-related costs in Newmont's merchant banking unit, which will be closed, reduced profit by US$1.67 billion. Newmont also unwound all of its forward-sales contracts, incurring costs of US$460 million.

Newmont's cost of mining and selling its gold rose by 45% to US$433 an ounce, partly because of gains in the A$.

Costs also increased as Newmont brought new mines in Nevada into full production. Commercial gold output began last year at the Phoenix and Leeville mines in Nevada. Costs at the Nevada mines rose by 7.8% to US$485 an ounce because Phoenix's ore was harder than expected.

Newmont has forecast that it will sell 5.2 million ounces to 5.6 million ounces of gold this year at cost of US$375 to $400 an ounce.

What all of this confirms is that higher gold prices are needed in order to offset rising costs in the industry and it reinforces our positive long-term outlook on gold.

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