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Why Have Fresnillo Plc, Hochschild Mining Plc And African Barrick Gold PLC Plummeted This Morning?

Gold fell steadily last week, as the prospect of military action in Syria receded and investors bet that the Federal Reserve might decide to begin tapering its bond-buying programme this week. The price of gold for immediate delivery ended the week down by 4.6% at $1,326 per ounce.

Of course, the only practical way for most private investors to invest in gold is through exchange-traded funds. The largest gold ETF, the $41bn SPDR Gold Trust (NYSE: GLD.US), ended last week down 4.6% at $127.82, while London-listed Gold Bullion Securities (LSE: GBS) ended the week down 5.2% at $126.65. So far this year, shareholders of Gold Bullion Securities have seen the value of their holdings fall by 21.0%, while the value of SPDR Gold Trust shares has fallen by 21.5%.

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Monday market update

Most gold and silver miners saw their share prices fall in-line with underlying metal prices last week, but when markets opened this morning, three of the biggest London-listed gold and silver producers saw their share prices plummet.

Shortly after markets opened this morning, Fresnillo (LSE: FRES), Hochschild Mining (LSE: HOC) and African Barrick Gold (LSE: ABG) all fell by 10% or more, despite the price of gold remaining stable at around $1,325 per ounce. So what’s behind these sudden falls?

One factor could be a proposed mining levy in Mexico. All of Fresnillo’s gold and silver production is in Mexico, and Hochschild Mining also has significant operations in Mexico. According to the FT, the Mexican government is proposing a new 7.5% levy on miners’ pre-tax profits. Both Hochschild and Fresnillo are already struggling against the effects of high operating costs and falling metals prices, and this further cost could leave both companies struggling to turn a profit, now that gold and silver prices are trending lower again. Shortly after 9am, both Fresnillo and Hochschild Mining were down by 13%.

This morning’s other big faller was African Barrick Gold, which was down by 14% at 9am. African Barrick doesn’t have operations in Mexico, but the company recently reported all-in sustaining costs of $1,503 per ounce for gold production, meaning that it could face substantial losses if the price of gold continues to fall. Today’s 14% drop effectively reverses the gains made since the price of gold rebounded in August — a rebound that now appears to be over.

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> Roland does not own shares in any of the companies mentioned in this article.