Strategic Analysis Alacer Gold Corp and Gold and Mining Industry
Introduction
Gold is a precious metal with high ductility and malleability, and it finds application as jewelry and investment. It is considered to be one of the safest bet for investment, especially during economic instabilities. Consequently, rapid political instabilities in the Middle East and financial crisis led to rapid increase in the price of gold worldwide. Technological innovation is also a major factor that affects the gold and mining industry. Therefore, the strategic analysis narrows on the gold industry, with a specific focus on Alacer Gold Corporation. It looks at the trends in the industry and how Alacer Gold is performing in the gold market.
Overview of Alacer Gold
Alacer is a US-based gold company, which was initially known as Anatolia Minerals Development Limited (AMDL). Alacer has its headquarter in Eaglewood, Colorado in the USA. Alacer was founded when AMDL merged with Avoca Resources Limited (Alacer Gold 1). The company mines are mainly precious metals such as gold, silver, and copper. Alacer’s primary operations and projects take place in Australia and Turkey. Its primary business operations are carried out by its 80% owned Copler Gold Mines that is based in Turkey, which can produce about 17,000 tons of oxide ore every single day. Alacer, therefore, produces low-cost gold from oxide ore. Alacer, therefore, is one of the leading intermediate gold mining companies in the world.
Strategic Analysis of Gold and Mining Industry
Most metal prices fell between 2008 and 2009 due to the global economic recession. Many mining industries across the globe found it difficult to survive during the period due to reduced demand and low prices. In the quest to deal with challenges, many gold firms reduced their production rates, including some of the projects. The cash flow in gold and mining industry is volatile because it is significantly influenced by the prices of metal commodities (Wilkerson 4). However, the price and production behaviors of gold are different from other metals. For instance, when the prices of other metals were dropping by around 40% between 2008 and 2009, that of gold increased by about 6%. Therefore, the factors determining the demand and supply of gold do not have a high correlation economic crisis such as financial crisis that was witnessed between 2008 and 2009.
The increasing price of gold is foreseen to be a major factor that will shape the worldwide gold market, as many consumers and investors are buying gold for the purpose of long-term investment. Also, increased political unrest in various parts of the world of the world is also fueling the demand for gold. Despite a seemingly a brighter future for players in the gold sector, other factors like strikes and diminishing ore grades may hamper the expected growth in the industry. More than 50% of the gold that finds its way to the international market comes from mined gold (Shafiee and Erkan 181).
Currently, Asian Pacific is the largest producer and consumer of gold. China is regarded as the largest producer of mined gold, as it overtook South Africa in 2007. According to the World Gold Council report in 2013, China accounted for about 25% of the international jewelry market. The rapid economic growth and the rising middle class in the general population in Asian countries such as China and India are the major factors enhancing the demand for gold in the region. Increasing middle class in China with high disposable income are making the country the current largest market for gold and other minerals in the whole world (Shafiee and Erkan 181). Europe has been rated as the fastest growing region regarding gold production. Russia is the major producer of gold in the whole of Europe. Other leading gold producing countries in the entire world include Australia, Canada, USA, Brazil, Mexico, and Indonesia.
The demand and supply of gold have been increasing since the beginning of 2016. The provision of gold was increased by 10% in the second quarter of 2016 to 1,144.6 tons compared to 1,041.7 tons at the same time in 2015 (Shafiee and Erkan 183). The increase in the supply of gold was facilitated by an in the recycling of gold and rising prices. Gold demand also rose by 1064 tons by June of 2016. Economic and political uncertainties fueled the demand for gold. The UK referendum, the coming US election, and geopolitical unrest in the Middle East are some of the political factors that have made many people turn to gold as a long term investment. Also, the increasing number of small-scale investors is also enhancing the demand for gold in the western market.
Even though investing in gold has increased worldwide, the demand for jewelry has reduced. The steep price rises of gold are the primary factor that has led to a declining demand for gold jewelry in the global market. Recycling of gold is also another factor that has led to dwindling demand for jewelry in the international market. The rising prices of gold are making people sell gold jewelry for cash. Studies have shown that there is a strong correlation between the prices of gold and the rate of recycling. One of the econometric analysis found that a 1% increase in the price of gold leads to 0.6% increase in the supply of recycled gold. The recycling will remain to be a primary source of supply of gold in 2016 as the price of this limited commodity continues to rise.
The use of gold in the technology sector is also declining worldwide. The demand for gold used in the technology sector reduced by 3% in the second quarter of 2016 (Shafiee and Erkan 184). The manufacturers of electronics have responded to the increasing prices of gold, as they are now using cost saving techniques. The growth in the production of wireless electronics has led to a decline in the demand for gold bonding wires. The smart-device market is gradually maturing, and players in the electronics industry are reducing the use of gold to manufacture their products. The demand for gold bonding wires is declining as manufacturers are now opting for cheaper alternatives like palladium coated wires. The use of gold in dentistry is also declining due to the rising price of gold. For instance, in the second quarter of 2016, the demand for gold in dentistry decreased from 12.8 tons to 12.4 tons.
The gold and mining industry does not face a lot of economic regulations. However, due to environmental and safety concerns, gold and mining firms are exposed to some environmental and safety regulations. The companies are required to protect the environment while at the same time ensuring that their employees are safe when they are working in mining sites. There are some countries around the globe have strict environmental laws that make firms avoid the exploration due to increased cost of production. Therefore, many mining companies tend to move to countries with favorable environmental regulations. At the same time, mining companies must ensure the safety of employees who are always facing a lot of risks. Therefore, the demands for gold for investment is increasing while the use of gold in manufacturing other commodities like electronic is declining. Economic, political, and social uncertainties in various parts of the world are fueling the demand for gold, especially by investors. In rapid economic growth in the emerging economies such as China and India, the demand for gold is increasing as well. Therefore, the global gold and mining industry is sensitive to economic, political and social challenges facing the world today.
Strategic Analysis of Alacer Gold Corporation
Alacer is actively involved in the mining of precious metals such as gold, copper, and silver and it is currently running some mining projects. The company’s primary objective is to pursue its initiatives beyond its current mining plan (Alacer Gold 2). Some of its main undergoing projects include Copler oxide production optimization and Copper sulfide project. The copler oxide production optimization is aimed at expanding the current heap leach pad to 58 million tons. The current 70% of the project is within the existing mine permit areas, which is currently under construction. However, the remaining 30% of the area is awaiting approval; Alacer is determined to maximize and expand its currently existing reserve to optimize its production (Alacer Gold 1). Copler sulfide project is another initiative that Alacer is using to deliver its medium-term growth. The project will also boost its financial returns. Alacer is using the project to achieve its gold output plan of 3.7 million ounces at a very low production cost of about $637 per ounce. Therefore, the copler sulfide project is cost effective, and it is going to bring many benefits to the company.
Apart from the two most important projects, the company is also striving to pursue opportunities for further expansion to become a stable and sustainable a multi-mine company in the gold and mine industry. The company is coming up with other projects, especially in Turkey. Specifically, Alacer is advancing its Dursunbey project in western Turkey. Therefore, Alacer is an ambitious company that is rapidly expanding its production to cover as many areas as possible. Consequently, Alacer’s financial and production capacity is likely to increase shortly. Despite the rising cost of gold in the global market, Alacer performed poorly in 2013 because it recorded a loss of $417.6 million in the same year. At the same time, its revenue for gold sales also reduced during reduced in 2014. The company's gold sales revenue in 2014 was $291.5 million in 2014 $377 million that it earned in 2013 (Alacer Gold 3). The high cost of production was the main reason why the company performed poorly between 2013 and 2014. The failures prompted the management of Alacer to improve its production efficiencies. It used its main projects, especially Copler sulfide project to improve its production. The company is focusing on low-cost production to gain a competitive advantage in the global gold market. Due to its focus on the cheap product, the company earned a profit of US$46.6 million.
However, its gold production reduced by 10% to 204,665 ounces, which was produced at a total cost of US$482 million. The main reason why the company posted a strong profit in 2015 was its low operating cost that embraced in 2014. It also experienced a steady gold production during the year. Interestingly, the company managed to earn a strong profit in 2015 even though the price of gold decline by around 7% during the year. However, the cold sales in 2014 were more than that of 2015, as it sold $125,954 and $135,504 in 2015 and 2014 respectively (Alacer Gold 3). The financial performance shows that the main undoing for the company was its low production cost.
The company achieved its target that it set in 2015, as it was able to meet its production target of 204,665 ounces at a reduced cost of $482 per ounce. Initially, its production cost per ounce was $690, which means that the company significantly reduced its cost of production in 2015. As a result, Alacer was able to earn a steady profit of US$46.6 million in 2015. It intends to reduce its cost of production further through the use of modern technology. It is using advanced detail engineering to achieve its production targets.
Alacer also performed relatively well up to the second quarter of 2016. The company ended the month of June with a total cash of $311.4 million with a net attributable profit of 12.2 million. Its total working capital by the end of June was $351.7 million. The companies gold production also increased during the second quarter of 2016. Therefore, Alacer is expected to perform better in 2016 compared to 2015 due to its cost-effective initiatives that are aimed at reducing the cost of production while at the same time enhancing its production.
Alacer has three main competitors, and they include Newmont Mining Corporation, Eldorado Gold Corporation, and Inmet Mining Corporation (Alacer Gold 2). Out of the three competitors, Newmont is the main competitor because it is relatively large, which makes it enjoy economies of scale. However, it only operates in Australia and not Turkey where Alacer is currently expanding its operations. Eldorado, nevertheless, is competing with Alacer in Turkey where it has gold production plant. Apart from the three top competitors, Alacer is also facing competition from other MNCs in the gold and mining industry.
Conclusion
Works Cited
Alacer Gold. “Management’s Discussion and Analysis” (2015). Retrieved 19/08/2016 from http://www.alacergold.com/docs/default-source/Regulatory-Filings/alacer-q2-2015-mda--final.pdf?sfvrsn=2
Shafiee, Shahriar, and Erkan Topal. “An overview of global gold market and gold price forecasting.” Resources Policy 35.3 (2010): 178-189.
Wilkerson, Jared Aaron. “Competition and regulation in the gold industry: an American perspective.” University of Botswana Law Journal 12 (2010).
