George Soros, founder of Soros Fund Management LLC, gestures as he speaks during a Bloomberg Television interview in Budapest, Hungary, on Thursday, Sept. 13, 2012. Soros said he expects Spain to request a �very limited� bailout from the European Union, with Prime Minister Mariano Rajoy seeking to avoid damaging political fallout at home. Photographer: Akos Stiller/Bloomberg *** Local Caption *** George Soros

Thomas Biesheuvel

gold mine investors are losing patience with the management teams in the $60 billion (R520bn) industry as their shares head for the first back-to-back annual slump since 1998, even as the metal completes a dozen years of gains.

Producers from Canada’s Barrick Gold to Newmont Mining of the US are failing to control expenses.

The average cost to extract an ounce of gold by the largest mining firms jumped 23 percent to $584.70 last year, Bloomberg data show. In contrast, silver production costs fell 12 percent to the lowest since 2007.

Money managers, including billionaire investor George Soros, have reacted by boosting stakes in physical gold, pushing gold mine executives to resign, or shifting into silver.

Direct holdings of the metal reached a record 2 629.3 tons on Monday, valued at $145bn, after more than tripling in five years, data show.

“Investors are very critical, voting with their feet and pushing management teams to resign,” said John Wong, a portfolio manager at CQS Group’s New City Investment Managers. “You can tell from the way investors sold Barrick down that they are on short fuses.”

Barrick’s board replaced former chief executive Aaron Regent with chief financial officer Jamie Sokalsky on June 6, saying it was “disappointed” in the share performance after costs rose and production dropped. Since then the stock has lost another 19 percent as the company missed earnings for a fourth consecutive quarter.

At least five more gold chief executives have lost their jobs this year.

Silver producers comprise three of the five biggest holdings in Wong’s $94 million Golden Prospect Precious Metals, led by Silver Wheaton. In 2010, four of the fund’s five largest holdings were gold producers.

The NYSE Arca Gold BUGS index of gold mining companies has declined 24 percent in the past two years compared with a 4.4 percent gain in the MSCI World index. The performance was a result of an “appalling track record of value destruction” by management teams, said Evy Hambro, the manager of BlackRock’s $12bn World Mining Fund.

Gold producers make up six of the eight worst performers in the Standard & Poor’s global resources index this year, with IamGold, Harmony Gold and AngloGold Ashanti posting the biggest declines.

The Arca benchmark gold index has fallen about 12 percent this year compared with a 9 percent gain in the price of the metal. The Bloomberg world mining index is little changed, while key materials such as iron ore and thermal coal dropped 11 percent and 16 percent, respectively. Copper has gained 6.7 percent. Gold was fixed 0.37 percent up at $1 716.25 an ounce in London yesterday afternoon.

Gold companies also face competition from gold-backed exchange-traded products (ETPs), as investors bet on bullion without the operational risks from mining.

Soros boosted his stake in exchange-traded products backed by gold in the third quarter. Soros Fund Management increased its investment in the SPDR Gold Trust, the biggest fund focused on the metal, by 49 percent to 1.32 million shares as of September 30 from three months earlier, a US Securities and Exchange Commission filing showed.

“We are at a watershed where the message from shareholders is very loud and clear: ‘We do not like what you do,’” Craton Capital Precious Metal Fund manager Markus Bachmann said in Johannesburg. “The costs are too high, the returns are not good enough.”

Still, producers with good management and operations might be set to benefit from slowing cost inflation and rising gold prices, investors said.

Gold may advance to $1 850 an ounce next year, according to the median forecast of 24 analysts, while cost inflation of 19 percent in the past 12 months may ease as the mining industry curtails expansion in response to faltering Chinese demand.

“There are signs that the cost inflation is being contained, which will help the companies,” Bachmann said. “By and large we will see a healthier industry next year.”

Canadian producer Kinross Gold fired its chief executive, Tye Burt, in August. The company said a change of leadership was needed to guide it through capital allocation and project development improvements.

In October, Kinross said chief financial officer Paul Barry would leave the company.

New Kinross chief executive Paul Rollinson said: “Kinross was the first of the majors to respond decisively in early 2012 to industrywide cost escalation: first by resequencing our growth projects to reduce our overall capital commitments and second by pausing a large build at our Tasiast expansion project in order to review smaller, less capital intensive options.

“As a third step after I assumed the role of chief executive in mid-year we reduced our capital spending by $200m from our original 2012 forecast.”

Barrick said it was continuing a review of its assets and had deferred about $3bn in capital expenditure.

“Our overriding objective is to translate Barrick’s strengths and results into higher shareholder returns,” the company said. “We intend to deliver this through a disciplined capital allocation approach that maximises risk-adjusted returns.”

US gold giant Newmont said it had cut operating and administrative expenses and reduced spending on exploration and advanced projects.

Precious metal producers spent a record $53bn on deals in 2010 and a further $43bn last year as gold prices at all-time highs spurred deals. That led to write-downs that are an admission of overpaying.

Newmont took a $1.61bn write-down on its Hope Bay mine in Canada in February. Kinross took a $2.49bn write-down on its Tasiast mine in Mauritania, and Agnico-Eagle Mines wrote down its Meadowbank project in Canada.

“The lack of capital discipline is… the biggest issue,” Wong said. “They have all relied on the gold price to bail them out, which is… a very bad way to manage a business.” – Bloomberg