It is too early to buy the gold miners despite July’s 7% gold price recovery to $1,322 per ounce. The prospect of asset write-downs, debt pressures, reduced cashflows and dividend cuts are set to weigh on the sector with African Barrick Gold (ABG) one name in particular that is well worth avoiding.

Miners are undertaking operational changes to survive lower gold prices, so cost structures are likely to be realigned over the coming months. If you are bullish on the shiny metal, wait for write-downs and restructuring plans before going on a buying spree, so as to get a clearer idea of future potential cashflows.

One of the world’s largest gold producers, Newcrest Mining (NCM:ASX) has fallen 7.9% since it warned (7 Jun) of $5 billion to $6 billion of asset write-downs and a likely dividend suspension when finals are published (12 Aug). Polymetal International (POLY) on Monday (29 Jul) flagged a potential $280 million to $340 million impairment charge would be revealed alongside its interims (28 Aug). A repeat of last year’s special dividend looks highly unlikely.

African Barrick Gold fell 3.2% to 113.1p on Tuesday (30 Jul) as it incurred $727 million of write-downs and lowered its dividend. Production is going well but all-in sustaining costs of $1,507 per ounce for the first half remain higher than its average gold selling price of $1,480 per ounce. The miner has big cost-saving plans but the details need to be seen before it can regain market credibility.

Investors have historically focused on cash costs but these understate the true expense of running a mining business. The gold industry average cash cost in 2012 was $708 per ounce yet its all-in sustaining cost - the new measure on which to focus - was $1,060 per ounce, according to Numis estimates.

Goldman Sachs reckons gold will sink to $1,050 per ounce by the end of 2014. We are also bearish and point to robust economic data in late July from Europe and the US, where the latter’s manufacturing figures were particularly strong. The more robust the global recovery, the more likely central banks are to rein in QE. Gold is seen as a hedge against money printing and benefits from negative real interest rates as there is no cost of ownership. Rising returns on cash and less central bank QE would both reduce demand for the precious metal.

Shares says: Do not be fooled by the sector rebound. There could be nasty shocks over the coming months as gold miners suffer restructuring costs. That said, such actions should provide longer-term benefits so there will come a time to reconsider the sector - just not yet. Sell African Barrick Gold at 113.1p.

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