by James Brumley | September 17, 2012 9:04 am
By all accounts, gold miners should be making an amazing amount of money right now. Though still shy of last year’s peak price of around $1,900 per ounce, the current price of $1,733 for gold is plenty big enough to mean super-wide margins for the companies digging the stuff up.
Then again, even the “weak” prices of $1,550 we were struggling with in May were still ridiculously high in the grand scheme of things, so we shouldn’t have felt sorry for any gold mining operations within the past year-and-a-half.
Yet, some mining operations seem to be perennial disappointments, unable to live up to expectations no matter what the environment is like. Assuming nothing has really changed between then and now, here are some gold miner stocks you might want to steer clear of.
Oh, they each have their good points. It’s just that they have more — or bigger — bad points.
To give credit where it’s due, Golden Star Resources (AMEX:GSS) has cranked up its revenue measurably since 2009, from $400 million then to last year’s $471 million. But it was the rising price of gold that did all of that work; gold sales (which are largely a reflection of production) fell from 409,902 ounces in 2009 to 354,904 ounces in 2010 to 301,120 ounces in 2011.
Generally speaking, miners want to mine faster and sell more when gold prices are strong, then slow down the sales/production pace when gold prices are weak. Golden Star did the opposite, which might be a hint that production — even just maintaining its production levels — is a struggle.
From a distance, New Gold (AMEX:NGD) looks like a smashing success story. Revenue grew from $143 million in 2008 to $695 million in 2011. The miner swung to a profit in 2010, and the bottom line soared to a solid $179 million last year when gold prices were so firm.
When you drill down into the past four quarters, though, the top line has been consistently around the $173 million area, but net income has dwindled from $78 million in Q2 2011 to only $24 million in Q2 2012.
What does it mean? It means New Gold is a little too sensitive to falling gold prices and — apparently — other costs like rising fuel prices.
Most every gold miner has seen profits dwindle from the earnings levels seen a year ago. It’s just that most of them saw the bottom line shrink to the same basic degree as their top lines. New Gold’s top line has held steady for four quarters now, yet earnings are less than half of what they were a year earlier.
Miners have to spend money to make money — that’s just a fact of life. No new source is ready to be productive out of the gate, and it takes a lot of time, manpower and equipment to dig holes deep and big enough to get at the earth’s biggest remaining gold deposits. Eventually, though, a gold miner has to actually start spending and start gold production.
In that regard, NovaGold Resources (AMEX:NG) has taken too long, and spent too much, to have nothing to show for the $670 million it has spent the past five years developing its Donlin (Alaska) deposit and its 50% stake in Galore Creek (British Colombia). Both projects were initiated in 2007.
In fairness to the company, considering the company expects Donlin to produce more than a million ounces of gold per year for 27 years, investors should be willing to give it some time. Thing is, the last word (from the website) was “Donlin Gold recently commenced permitting, which is a clearly defined process expected to take three to four years.”
The waiting is getting old.
In late 2010, Brigus Gold (AMEX:BRD) announced production guidance of between 102,000 and 112,000 ounces of gold for the next year. In early 2012, it reported actual 2011 production of just a little less than 56,000 ounces of gold in 2011.
In that same announcement of last year’s total production, BRD also posted a production expectation for this year’s Q2 of between 18,000 and 21,000 ounces of gold. Last month, it reported actual Q2 production of 15,688 ounces of gold.
See a pattern? Brigus has a tendency to paint a bullish picture, but doesn’t always live up to its goal.
Undoubtedly, fans of these four gold mining names will disagree, citing their positive attributes like growing proven reserves, or the approach toward significant production. There’s no arguing that there’s something to like about all of them. But, when there are other mining alternatives out there without the blaring problems described above, why would you choose one of the faulted names?
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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